The Returns At CIMC Vehicles (Group) (HKG:1839) Provide Us With Signs Of What's To Come

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, the ROCE of CIMC Vehicles (Group) (HKG:1839) looks decent, right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on CIMC Vehicles (Group) is:

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

0.13 = CN¥1.3b ÷ (CN¥21b - CN¥11b) (Based on the trailing twelve months to June 2020).

Thus, CIMC Vehicles (Group) has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Machinery industry.

Check out our latest analysis for CIMC Vehicles (Group)

In the above chart we have measured CIMC Vehicles (Group)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CIMC Vehicles (Group) here for free.

So How Is CIMC Vehicles (Group)'s ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 13% for the last three years, and the capital employed within the business has risen 28% in that time. 13% is a pretty standard return, and it provides some comfort knowing that CIMC Vehicles (Group) has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, CIMC Vehicles (Group) has a high ratio of current liabilities to total assets of 51%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On CIMC Vehicles (Group)'s ROCE

The main thing to remember is that CIMC Vehicles (Group) has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 24% to shareholders over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 1 warning sign for CIMC Vehicles (Group) you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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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