Returns On Capital At TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129) Have Stalled

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129), it didn't seem to tick all of these boxes.

What Is 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 TCL Zhonghuan Renewable Energy TechnologyLtd, this is the formula:

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

0.034 = CN¥3.5b ÷ (CN¥125b - CN¥22b) (Based on the trailing twelve months to March 2024).

So, TCL Zhonghuan Renewable Energy TechnologyLtd has an ROCE of 3.4%. On its own, that's a low figure but it's around the 3.9% average generated by the Semiconductor industry.

Check out 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're interested, you can view the analysts predictions in our free analyst report for TCL Zhonghuan Renewable Energy TechnologyLtd .

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

In terms of TCL Zhonghuan Renewable Energy TechnologyLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.4% for the last five years, and the capital employed within the business has risen 277% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, TCL Zhonghuan Renewable Energy TechnologyLtd has done well to reduce current liabilities to 18% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On TCL Zhonghuan Renewable Energy TechnologyLtd's ROCE

Long story short, while TCL Zhonghuan Renewable Energy TechnologyLtd has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 9.8% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about TCL Zhonghuan Renewable Energy TechnologyLtd, we've spotted 4 warning signs, and 2 of them are potentially serious.

While TCL Zhonghuan Renewable Energy TechnologyLtd isn't earning the highest return, check out this free list of companies that are 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.

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