Returns Are Gaining Momentum At Qingdao TGOOD Electric (SZSE:300001)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Qingdao TGOOD Electric (SZSE:300001) and its trend of ROCE, we really liked what we saw.

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 Qingdao TGOOD Electric, this is the formula:

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

0.11 = CN¥1.2b ÷ (CN¥24b - CN¥13b) (Based on the trailing twelve months to September 2024).

Thus, Qingdao TGOOD Electric has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.8% it's much better.

Check out our latest analysis for Qingdao TGOOD Electric

In the above chart we have measured Qingdao TGOOD Electric's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Qingdao TGOOD Electric for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Qingdao TGOOD Electric. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 124%. So we're very much inspired by what we're seeing at Qingdao TGOOD Electric thanks to its ability to profitably reinvest capital.

One more thing to note, Qingdao TGOOD Electric has decreased current liabilities to 55% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. 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. Considering the stock has delivered 19% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

One more thing, we've spotted 1 warning sign facing Qingdao TGOOD Electric that you might find interesting.

While Qingdao TGOOD Electric 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.