Central New Energy Holding Group (HKG:1735) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Central New Energy Holding Group (HKG:1735) so let's look a bit deeper.

Understanding 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 Central New Energy Holding Group is:

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).

Therefore, 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 6.4%.

See our latest analysis for Central New Energy Holding Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Central New Energy Holding Group'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 Central New Energy Holding Group.

What The Trend Of ROCE Can Tell Us

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. About five years ago the company was generating losses but things have turned around because it's now earning 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 indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

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. Effectively this means that suppliers or short-term creditors are now funding 62% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

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. Since the stock has returned a staggering 1,989% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

On a separate note, we've found 2 warning signs for Central New Energy Holding Group you'll probably want to know about.

While Central New Energy Holding Group 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.