There Are Reasons To Feel Uneasy About Tsaker New Energy Tech's (HKG:1986) 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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Tsaker New Energy Tech (HKG:1986), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Tsaker New Energy Tech, this is the formula:

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

0.042 = CN¥96m ÷ (CN¥3.5b - CN¥1.1b) (Based on the trailing twelve months to December 2023).

Therefore, Tsaker New Energy Tech has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.2%.

See our latest analysis for Tsaker New Energy Tech

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Tsaker New Energy Tech's past further, check out this free graph covering Tsaker New Energy Tech's past earnings, revenue and cash flow.

What Can We Tell From Tsaker New Energy Tech's ROCE Trend?

In terms of Tsaker New Energy Tech's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.2% from 21% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Tsaker New Energy Tech's ROCE

To conclude, we've found that Tsaker New Energy Tech is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 47% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Tsaker New Energy Tech does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit concerning...

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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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.

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