China Automotive Systems (NASDAQ:CAAS) Is Doing The Right Things To Multiply Its Share Price
What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, China Automotive Systems (NASDAQ:CAAS) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for China Automotive Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = US$23m ÷ (US$708m - US$343m) (Based on the trailing twelve months to September 2023).
Thus, China Automotive Systems has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 12%.
See our latest analysis for China Automotive Systems
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Automotive Systems' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Automotive Systems, check out these free graphs here.
How Are Returns Trending?
China Automotive Systems has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 628% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
On a separate but related note, it's important to know that China Automotive Systems has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On China Automotive Systems' ROCE
As discussed above, China Automotive Systems appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 7.9% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
China Automotive Systems does have some risks though, and we've spotted 1 warning sign for China Automotive Systems that you might be interested in.
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. 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.
