Returns On Capital Are Showing Encouraging Signs At Delixi New Energy Technology (SHSE:603032)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at Delixi New Energy Technology (SHSE:603032) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Delixi New Energy Technology:

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

0.13 = CN¥207m ÷ (CN¥1.7b - CN¥151m) (Based on the trailing twelve months to September 2023).

Therefore, Delixi New Energy Technology has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.2% it's much better.

Check out our latest analysis for Delixi New Energy Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Delixi New Energy Technology's ROCE against it's prior returns. If you're interested in investigating Delixi New Energy Technology's past further, check out this free graph covering Delixi New Energy Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Delixi New Energy Technology has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 13% on its capital. In addition to that, Delixi New Energy Technology is employing 244% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Delixi New Energy Technology's ROCE

Long story short, we're delighted to see that Delixi New Energy Technology's reinvestment activities have paid off and the company is now profitable. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with Delixi New Energy Technology and understanding it should be part of your investment process.

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.