Returns on Capital Paint A Bright Future For Guangdong TCL Smart Home Appliances (SZSE:002668)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Guangdong TCL Smart Home Appliances (SZSE:002668) looks great, so lets see what the trend can tell us.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Guangdong TCL Smart Home Appliances:

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

0.46 = CN¥1.9b ÷ (CN¥14b - CN¥10b) (Based on the trailing twelve months to June 2024).

So, Guangdong TCL Smart Home Appliances has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 8.9%.

View our latest analysis for Guangdong TCL Smart Home Appliances

Above you can see how the current ROCE for Guangdong TCL Smart Home Appliances 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 Guangdong TCL Smart Home Appliances for free.

What Does the ROCE Trend For Guangdong TCL Smart Home Appliances Tell Us?

Shareholders will be relieved that Guangdong TCL Smart Home Appliances has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 46%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 71% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

To sum it up, Guangdong TCL Smart Home Appliances is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 19% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Guangdong TCL Smart Home Appliances does come with some risks, and we've found 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.