Returns On Capital Are Showing Encouraging Signs At Zhejiang Tengy Environmental Technology (HKG:1527)

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Zhejiang Tengy Environmental Technology's (HKG:1527) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zhejiang Tengy Environmental Technology:

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

0.10 = CN¥90m ÷ (CN¥1.8b - CN¥950m) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Tengy Environmental Technology has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 8.8%.

View our latest analysis for Zhejiang Tengy Environmental Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Tengy Environmental Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Tengy Environmental Technology.

What Does the ROCE Trend For Zhejiang Tengy Environmental Technology Tell Us?

Zhejiang Tengy Environmental Technology is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 72% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Another thing to note, Zhejiang Tengy Environmental Technology has a high ratio of current liabilities to total assets of 52%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Zhejiang Tengy Environmental Technology's ROCE

To bring it all together, Zhejiang Tengy Environmental Technology has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 64% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Zhejiang Tengy Environmental Technology does come with some risks, and we've found 2 warning signs that you should be aware of.

While Zhejiang Tengy Environmental Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.