China Suntien Green Energy (HKG:956) Hasn't Managed To Accelerate Its Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating China Suntien Green Energy (HKG:956), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for China Suntien Green Energy, this is the formula:

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

0.073 = CN¥4.1b ÷ (CN¥74b - CN¥18b) (Based on the trailing twelve months to September 2022).

So, China Suntien Green Energy has an ROCE of 7.3%. On its own, that's a low figure but it's around the 8.9% average generated by the Oil and Gas industry.

Check out 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, you can check out the forecasts from the analysts covering China Suntien Green Energy here for free.

What Does the ROCE Trend For China Suntien Green Energy Tell Us?

There are better returns on capital out there than what we're seeing at China Suntien Green Energy. The company has employed 127% more capital in the last five years, and the returns on that capital have remained stable at 7.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From China Suntien Green Energy's ROCE

In conclusion, China Suntien Green Energy has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 99% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing China Suntien Green Energy we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While China Suntien Green Energy 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.