Returns On Capital Are Showing Encouraging Signs At Caihong Display DevicesLtd (SHSE:600707)

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Caihong Display DevicesLtd (SHSE:600707) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Caihong Display DevicesLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.044 = CN¥1.4b ÷ (CN¥41b - CN¥9.5b) (Based on the trailing twelve months to September 2024).

Therefore, Caihong Display DevicesLtd has an ROCE of 4.4%. On its own, that's a low figure but it's around the 5.5% average generated by the Electronic industry.

View our latest analysis for Caihong Display DevicesLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Caihong Display DevicesLtd's ROCE against it's prior returns. If you'd like to look at how Caihong Display DevicesLtd has performed in the past in other metrics, you can view this free graph of Caihong Display DevicesLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Caihong Display DevicesLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 4.4% on its capital. While returns have increased, the amount of capital employed by Caihong Display DevicesLtd has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

As discussed above, Caihong Display DevicesLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 87% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Caihong Display DevicesLtd you'll probably want to know about.

While Caihong Display DevicesLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.