China Suntien Green Energy (HKG:956) Has Some Way To Go To Become A Multi-Bagger

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at China Suntien Green Energy (HKG:956) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for China Suntien Green Energy:

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

0.073 = CN¥4.3b ÷ (CN¥77b - CN¥19b) (Based on the trailing twelve months to December 2022).

So, China Suntien Green Energy has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.3%.

View our latest analysis for China Suntien Green Energy

In the above chart we have measured China Suntien Green Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Suntien Green Energy.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at China Suntien Green Energy. Over the past five years, ROCE has remained relatively flat at around 7.3% and the business has deployed 135% more capital into its operations. 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.

The Bottom Line

Long story short, while China Suntien Green Energy has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 103% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

China Suntien Green Energy does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.