Some Investors May Be Worried About Tianneng Battery Group's (SHSE:688819) Returns On Capital

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. Although, when we looked at Tianneng Battery Group (SHSE:688819), it didn't seem to tick all of these boxes.

What Is 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 Tianneng Battery Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.075 = CN¥1.5b ÷ (CN¥43b - CN¥23b) (Based on the trailing twelve months to March 2024).

Thus, Tianneng Battery Group has an ROCE of 7.5%. On its own, that's a low figure but it's around the 6.9% average generated by the Auto Components industry.

View our latest analysis for Tianneng Battery Group

Above you can see how the current ROCE for Tianneng Battery Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Tianneng Battery Group .

What Does the ROCE Trend For Tianneng Battery Group Tell Us?

On the surface, the trend of ROCE at Tianneng Battery Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.5% from 29% five years ago. However it looks like Tianneng Battery Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Tianneng Battery Group has decreased its current liabilities to 53% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 53% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Tianneng Battery Group's ROCE

In summary, Tianneng Battery Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 33% in the last three years. Therefore based on the analysis done in this article, we don't think Tianneng Battery Group has the makings of a multi-bagger.

On a separate note, we've found 2 warning signs for Tianneng Battery Group you'll probably want to know about.

While Tianneng Battery 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.