The Returns At Zhejiang Tengy Environmental Technology (HKG:1527) Aren't Growing

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Zhejiang Tengy Environmental Technology (HKG:1527) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Zhejiang Tengy Environmental Technology, this is the formula:

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

0.081 = CN¥71m ÷ (CN¥1.8b - CN¥927m) (Based on the trailing twelve months to December 2023).

Thus, Zhejiang Tengy Environmental Technology has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.1%.

See our latest analysis for Zhejiang Tengy Environmental Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Zhejiang Tengy Environmental Technology has performed in the past in other metrics, you can view this free graph of Zhejiang Tengy Environmental Technology's past earnings, revenue and cash flow.

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

The returns on capital haven't changed much for Zhejiang Tengy Environmental Technology in recent years. The company has consistently earned 8.1% for the last five years, and the capital employed within the business has risen 21% 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 separate but related note, it's important to know that Zhejiang Tengy Environmental Technology has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In conclusion, Zhejiang Tengy Environmental Technology has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Zhejiang Tengy Environmental Technology does have some risks though, and we've spotted 2 warning signs for Zhejiang Tengy Environmental Technology that you might be interested in.

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.