TCL Electronics Holdings (HKG:1070) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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, TCL Electronics Holdings (HKG:1070) looks quite promising in regards to its trends of return on capital.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on TCL Electronics Holdings is:

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

0.074 = HK$1.4b ÷ (HK$76b - HK$57b) (Based on the trailing twelve months to December 2024).

Therefore, TCL Electronics Holdings has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 13%.

View our latest analysis for TCL Electronics Holdings

In the above chart we have measured TCL Electronics Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for TCL Electronics Holdings .

What Can We Tell From TCL Electronics Holdings' ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 7.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 58%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

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 75% 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

All in all, it's terrific to see that TCL Electronics Holdings is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 147% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for TCL Electronics Holdings that we think you should be aware of.

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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.