China Suntien Green Energy (HKG:956) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in China Suntien Green Energy's (HKG:956) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China Suntien Green Energy is:

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

0.074 = CN¥3.4b ÷ (CN¥60b - CN¥14b) (Based on the trailing twelve months to March 2021).

Therefore, China Suntien Green Energy has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Oil and Gas industry average of 6.1%.

See our latest analysis for China Suntien Green Energy

Above you can see how the current ROCE for China Suntien Green Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is China Suntien Green Energy's ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. 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 109%. So we're very much inspired by what we're seeing at China Suntien Green Energy thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China Suntien Green Energy has. Since the stock has returned a staggering 348% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

China Suntien Green Energy does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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