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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in China Tianrui Automotive Interiors’ (HKG:6162) returns on capital, so let’s have a look.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Tianrui Automotive Interiors, this is the formula:
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).
So, 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 8.4%.
View 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.
What Can We Tell From China Tianrui Automotive Interiors’ ROCE Trend?
We like the trends that we’re seeing from China Tianrui Automotive Interiors. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. The amount of capital employed has increased too, by 88%. So we’re very much inspired by what we’re seeing at China Tianrui Automotive Interiors thanks to its ability to profitably reinvest capital.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 55% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that’s pretty high.
Our Take On China Tianrui Automotive Interiors’ ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what China Tianrui Automotive Interiors has. Since the stock has returned a solid 81% 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.
On a final note, we’ve found 2 warning signs for China Tianrui Automotive Interiors that we think you should be aware of.
China Tianrui Automotive Interiors is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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