Investors Will Want Qingdao TGOOD Electric's (SZSE:300001) Growth In ROCE To Persist

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at Qingdao TGOOD Electric (SZSE:300001) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Qingdao TGOOD Electric, this is the formula:

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

0.088 = CN¥958m ÷ (CN¥23b - CN¥12b) (Based on the trailing twelve months to June 2024).

Therefore, Qingdao TGOOD Electric has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.0%.

View our latest analysis for Qingdao TGOOD Electric

Above you can see how the current ROCE for Qingdao TGOOD Electric 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 Qingdao TGOOD Electric .

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 130% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 53%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Qingdao TGOOD Electric has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

All in all, it's terrific to see that Qingdao TGOOD Electric is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 11% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

While Qingdao TGOOD Electric looks impressive, no company is worth an infinite price. The intrinsic value infographic for 300001 helps visualize whether it is currently trading for a fair price.

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.

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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.