What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at CALB Group (HKG:3931) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for CALB Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.009 = CN¥615m ÷ (CN¥105b - CN¥37b) (Based on the trailing twelve months to December 2023).
So, CALB Group has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.2%.
See our latest analysis for CALB Group
In the above chart we have measured CALB Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for CALB Group .
The Trend Of ROCE
The fact that CALB Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 0.9% which is a sight for sore eyes. In addition to that, CALB Group is employing 815% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line On CALB Group's ROCE
Long story short, we're delighted to see that CALB Group's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 22% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
CALB Group does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...
While CALB Group 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.
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