Returns On Capital Are Showing Encouraging Signs At TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for TCL Zhonghuan Renewable Energy TechnologyLtd, this is the formula:

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

0.08 = CN¥8.5b ÷ (CN¥127b - CN¥20b) (Based on the trailing twelve months to September 2023).

So, TCL Zhonghuan Renewable Energy TechnologyLtd has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 5.3%.

View our latest analysis for TCL Zhonghuan Renewable Energy TechnologyLtd

Above you can see how the current ROCE for TCL Zhonghuan Renewable Energy TechnologyLtd 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 TCL Zhonghuan Renewable Energy TechnologyLtd for free.

What Can We Tell From TCL Zhonghuan Renewable Energy TechnologyLtd's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 318% more capital is being employed now too. 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 16%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, it's great to see that TCL Zhonghuan Renewable Energy TechnologyLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 57% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching TCL Zhonghuan Renewable Energy TechnologyLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While TCL Zhonghuan Renewable Energy TechnologyLtd 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.