Hunan Yuneng New Energy Battery MaterialLtd (SZSE:301358) Is Investing Its Capital With Increasing Efficiency

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Hunan Yuneng New Energy Battery MaterialLtd's (SZSE:301358) returns on capital, so let's have a look.

What Is 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 Hunan Yuneng New Energy Battery MaterialLtd, this is the formula:

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

0.25 = CN¥3.6b ÷ (CN¥27b - CN¥13b) (Based on the trailing twelve months to September 2023).

Thus, Hunan Yuneng New Energy Battery MaterialLtd has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 6.4% earned by companies in a similar industry.

Check out our latest analysis for Hunan Yuneng New Energy Battery MaterialLtd

In the above chart we have measured Hunan Yuneng New Energy Battery MaterialLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hunan Yuneng New Energy Battery MaterialLtd .

What Can We Tell From Hunan Yuneng New Energy Battery MaterialLtd's ROCE Trend?

Investors would be pleased with what's happening at Hunan Yuneng New Energy Battery MaterialLtd. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 25%. 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 2,500%. So we're very much inspired by what we're seeing at Hunan Yuneng New Energy Battery MaterialLtd thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 47% of the business, which is more than it was four years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Hunan Yuneng New Energy Battery MaterialLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hunan Yuneng New Energy Battery MaterialLtd has. Astute investors may have an opportunity here because the stock has declined 26% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

Hunan Yuneng New Energy Battery MaterialLtd does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.