We Like These Underlying Return On Capital Trends At China Motor (TWSE:2204)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in China Motor's (TWSE:2204) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for China Motor:

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

0.074 = NT$3.0b ÷ (NT$53b - NT$13b) (Based on the trailing twelve months to June 2024).

So, China Motor has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Auto industry average of 4.0%.

View our latest analysis for China Motor

Above you can see how the current ROCE for China Motor compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China Motor .

The Trend Of ROCE

China Motor has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 137% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, China Motor appears to been achieving more with less, since the business is using 28% less capital to run its operation. China Motor may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line On China Motor's ROCE

In a nutshell, we're pleased to see that China Motor has been able to generate higher returns from less capital. And a remarkable 117% 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, we've spotted 1 warning sign facing China Motor that you might find interesting.

While China Motor may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.