Returns On Capital Are Showing Encouraging Signs At Add New Energy Investment Holdings Group (HKG:2623)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Add New Energy Investment Holdings Group (HKG:2623) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Add New Energy Investment Holdings Group:

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

0.073 = CN¥35m ÷ (CN¥663m - CN¥188m) (Based on the trailing twelve months to December 2020).

Thus, Add New Energy Investment Holdings Group has an ROCE of 7.3%. On its own, that's a low figure but it's around the 8.8% average generated by the Metals and Mining industry.

View our latest analysis for Add New Energy Investment Holdings Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Add New Energy Investment Holdings Group's ROCE against it's prior returns. If you'd like to look at how Add New Energy Investment Holdings Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

It's great to see that Add New Energy Investment Holdings Group has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 7.3% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 37%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

What We Can Learn From Add New Energy Investment Holdings Group's ROCE

In summary, it's great to see that Add New Energy Investment Holdings Group has been able to turn things around and earn higher returns on lower amounts of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 69% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Add New Energy Investment Holdings Group does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are potentially serious...

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. 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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