Tsaker New Energy Tech (HKG:1986) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at Tsaker New Energy Tech (HKG:1986) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Tsaker New Energy Tech:

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

0.037 = CN¥85m ÷ (CN¥3.4b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

Therefore, Tsaker New Energy Tech has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.0%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Tsaker New Energy Tech.

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

When we looked at the ROCE trend at Tsaker New Energy Tech, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.7% from 43% five years ago. However it looks like Tsaker New Energy Tech might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Tsaker New Energy Tech is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 30% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Tsaker New Energy Tech has the makings of a multi-bagger.

One more thing: We've identified 5 warning signs with Tsaker New Energy Tech (at least 2 which shouldn't be ignored) , and understanding them would certainly be useful.

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.