Tongyi Carbon Neutral Technology (Xinjiang) (SHSE:600506) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Tongyi Carbon Neutral Technology (Xinjiang) (SHSE:600506) looks quite promising in regards to its trends of return on capital.

Understanding 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. The formula for this calculation on Tongyi Carbon Neutral Technology (Xinjiang) is:

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

0.05 = CN¥54m ÷ (CN¥2.3b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Therefore, Tongyi Carbon Neutral Technology (Xinjiang) has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

See our latest analysis for Tongyi Carbon Neutral Technology (Xinjiang)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tongyi Carbon Neutral Technology (Xinjiang)'s ROCE against it's prior returns. If you're interested in investigating Tongyi Carbon Neutral Technology (Xinjiang)'s past further, check out this free graph covering Tongyi Carbon Neutral Technology (Xinjiang)'s past earnings, revenue and cash flow.

What Does the ROCE Trend For Tongyi Carbon Neutral Technology (Xinjiang) Tell Us?

Tongyi Carbon Neutral Technology (Xinjiang) has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 5.0% on its capital. And unsurprisingly, like most companies trying to break into the black, Tongyi Carbon Neutral Technology (Xinjiang) is utilizing 272% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 52% of its operations, which isn't ideal. 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

Long story short, we're delighted to see that Tongyi Carbon Neutral Technology (Xinjiang)'s reinvestment activities have paid off and the company is now profitable. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 1 warning sign facing Tongyi Carbon Neutral Technology (Xinjiang) that you might find interesting.

While Tongyi Carbon Neutral Technology (Xinjiang) 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.

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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.

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