Investors Will Want Hunan Yuneng New Energy Battery MaterialLtd's (SZSE:301358) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Hunan Yuneng New Energy Battery MaterialLtd (SZSE:301358) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hunan Yuneng New Energy Battery MaterialLtd:

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

0.11 = CN¥1.8b ÷ (CN¥26b - CN¥11b) (Based on the trailing twelve months to March 2024).

So, Hunan Yuneng New Energy Battery MaterialLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.0% it's much better.

View our latest analysis for Hunan Yuneng New Energy Battery MaterialLtd

Above you can see how the current ROCE for Hunan Yuneng New Energy Battery MaterialLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hunan Yuneng New Energy Battery MaterialLtd for free.

What Does the ROCE Trend For Hunan Yuneng New Energy Battery MaterialLtd Tell Us?

Investors would be pleased with what's happening at Hunan Yuneng New Energy Battery MaterialLtd. The data shows that returns on capital have increased substantially over the last five years to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 3,566% more capital is being employed now too. 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.

Another thing to note, Hunan Yuneng New Energy Battery MaterialLtd has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

All in all, it's terrific to see that Hunan Yuneng New Energy Battery MaterialLtd is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 35% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Hunan Yuneng New Energy Battery MaterialLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Hunan Yuneng New Energy Battery MaterialLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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