Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That’s why when we briefly looked at China Yongda Automobiles Services Holdings’ (HKG:3669) ROCE trend, we were pretty happy with what we saw.
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 China Yongda Automobiles Services Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = CN¥2.7b ÷ (CN¥35b – CN¥16b) (Based on the trailing twelve months to December 2020).
Therefore, China Yongda Automobiles Services Holdings has an ROCE of 14%. On its own, that’s a standard return, however it’s much better than the 8.7% generated by the Specialty Retail industry.
In the above chart we have measured China Yongda Automobiles Services Holdings’ prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for China Yongda Automobiles Services Holdings.
What Does the ROCE Trend For China Yongda Automobiles Services Holdings Tell Us?
While the current returns on capital are decent, they haven’t changed much. The company has employed 200% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that China Yongda Automobiles Services Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On a side note, China Yongda Automobiles Services Holdings has done well to reduce current liabilities to 46% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We’d like to see this trend continue though because as it stands today, thats still a pretty high level.
To sum it up, China Yongda Automobiles Services Holdings has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 289% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing, we’ve spotted 5 warning signs facing China Yongda Automobiles Services Holdings that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.