Under The Bonnet, China Tianrui Automotive Interiors' (HKG:6162) Returns Look Impressive

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 the ROCE trend of China Tianrui Automotive Interiors (HKG:6162) we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 China Tianrui Automotive Interiors:

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

0.26 = CN¥73m ÷ (CN¥626m - CN¥345m) (Based on the trailing twelve months to December 2020).

Thus, China Tianrui Automotive Interiors has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 8.2%.

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're interested in investigating China Tianrui Automotive Interiors' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China Tianrui Automotive Interiors Tell Us?

Investors would be pleased with what's happening at China Tianrui Automotive Interiors. The data shows that returns on capital have increased substantially over the last five years to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 88% more capital is being employed now too. So we're very much inspired by what we're seeing at China Tianrui Automotive Interiors thanks to its ability to profitably reinvest capital.

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 55% of the business, which is more than it was five 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.

In Conclusion...

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 only returned 4.6% to shareholders over the last year, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching China Tianrui Automotive Interiors, you might be interested to know about the 3 warning signs that our analysis has discovered.

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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This article by Simply Wall St is general in nature. 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.
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