These Trends Paint A Bright Future For China Tianrui Automotive Interiors (HKG:6162)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of China Tianrui Automotive Interiors (HKG:6162) we really liked what we saw.

Understanding 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. The formula for this calculation on China Tianrui Automotive Interiors is:

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

0.25 = CN¥67m ÷ (CN¥584m - CN¥318m) (Based on the trailing twelve months to June 2020).

So, China Tianrui Automotive Interiors has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 9.5%.

See our latest analysis for China Tianrui Automotive Interiors

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Tianrui Automotive Interiors' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Tianrui Automotive Interiors, check out these free graphs here.

The Trend Of ROCE

The trends we've noticed at China Tianrui Automotive Interiors are quite reassuring. The data shows that returns on capital have increased substantially over the last four years to 25%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 61%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 54% of the business, which is more than it was four years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From China Tianrui Automotive Interiors' ROCE

To sum it up, China Tianrui Automotive Interiors has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 10% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing China Tianrui Automotive Interiors we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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