Central New Energy Holding Group (HKG:1735) Is Doing The Right Things To Multiply Its Share Price

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Central New Energy Holding Group (HKG:1735) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Central New Energy Holding Group, this is the formula:

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

0.0038 = HK$6.3m ÷ (HK$4.4b - HK$2.7b) (Based on the trailing twelve months to June 2024).

Thus, Central New Energy Holding Group has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.9%.

See our latest analysis for Central New Energy Holding Group

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're interested in investigating Central New Energy Holding Group's past further, check out this free graph covering Central New Energy Holding Group's past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Central New Energy Holding Group is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Central New Energy Holding Group is utilizing 889% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 62% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Central New Energy Holding Group's ROCE

In summary, it's great to see that Central New Energy Holding Group has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Central New Energy Holding Group can keep these trends up, it could have a bright future ahead.

Central New Energy Holding Group does have some risks though, and we've spotted 2 warning signs for Central New Energy Holding Group that you might be interested in.

While Central New Energy Holding Group 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.