We Like These Underlying Return On Capital Trends At Chongqing Chuanyi Automation (SHSE:603100)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Chongqing Chuanyi Automation (SHSE:603100) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Chongqing Chuanyi Automation, this is the formula:

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

0.18 = CN¥800m ÷ (CN¥8.3b - CN¥3.9b) (Based on the trailing twelve months to December 2023).

Therefore, Chongqing Chuanyi Automation has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Electronic industry.

Check out our latest analysis for Chongqing Chuanyi Automation

In the above chart we have measured Chongqing Chuanyi Automation's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chongqing Chuanyi Automation .

How Are Returns Trending?

Investors would be pleased with what's happening at Chongqing Chuanyi Automation. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. The amount of capital employed has increased too, by 71%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, Chongqing Chuanyi Automation has a high ratio of current liabilities to total assets of 47%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

All in all, it's terrific to see that Chongqing Chuanyi Automation is reaping the rewards from prior investments and is growing its capital base. And a remarkable 213% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

One more thing to note, we've identified 1 warning sign with Chongqing Chuanyi Automation and understanding this should be part of your investment process.

While Chongqing Chuanyi Automation 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.