Investors Could Be Concerned With Chengdu Tangyuan ElectricLtd's (SZSE:300789) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Chengdu Tangyuan ElectricLtd (SZSE:300789) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Chengdu Tangyuan ElectricLtd is:

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

0.098 = CN¥98m ÷ (CN¥1.4b - CN¥361m) (Based on the trailing twelve months to September 2023).

Therefore, Chengdu Tangyuan ElectricLtd has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.2%.

Check out our latest analysis for Chengdu Tangyuan ElectricLtd

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

So How Is Chengdu Tangyuan ElectricLtd's ROCE Trending?

On the surface, the trend of ROCE at Chengdu Tangyuan ElectricLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.8% from 31% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Chengdu Tangyuan ElectricLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Chengdu Tangyuan ElectricLtd. These trends are starting to be recognized by investors since the stock has delivered a 0.7% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing: We've identified 3 warning signs with Chengdu Tangyuan ElectricLtd (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Chengdu Tangyuan ElectricLtd 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.