Returns on Capital Paint A Bright Future For Tianqi Lithium (SZSE:002466)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Tianqi Lithium (SZSE:002466) looks great, so lets see what the trend can tell us.

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. To calculate this metric for Tianqi Lithium, this is the formula:

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

0.37 = CN¥24b ÷ (CN¥70b - CN¥5.1b) (Based on the trailing twelve months to March 2024).

Therefore, Tianqi Lithium has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 5.5%.

View our latest analysis for Tianqi Lithium

Above you can see how the current ROCE for Tianqi Lithium compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Tianqi Lithium .

How Are Returns Trending?

Tianqi Lithium is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 37%. 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 60%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

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 Tianqi Lithium has. Since the stock has returned a solid 74% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Tianqi Lithium can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Tianqi Lithium, we've discovered 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.

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.