What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Changyuan Technology Group's (SHSE:600525) returns on capital, so let's have a look.
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 Changyuan Technology Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CN¥299m ÷ (CN¥16b - CN¥9.5b) (Based on the trailing twelve months to September 2023).
Thus, Changyuan Technology Group has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.
View our latest analysis for Changyuan Technology Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Changyuan Technology Group's ROCE against it's prior returns. If you'd like to look at how Changyuan Technology Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Changyuan Technology Group's ROCE Trend?
While the ROCE is still rather low for Changyuan Technology Group, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 38%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Changyuan Technology Group appears to been achieving more with less, since the business is using 49% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
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 59% 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.
Our Take On Changyuan Technology Group's ROCE
From what we've seen above, Changyuan Technology Group has managed to increase it's returns on capital all the while reducing it's capital base. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, Changyuan Technology Group does come with some risks, and we've found 1 warning sign that you should be aware of.
While Changyuan Technology Group 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.