Here's What To Make Of IRICO Group New Energy's (HKG:438) Decelerating Rates Of Return

Published
July 25, 2022
SEHK:438
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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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of IRICO Group New Energy (HKG:438) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on IRICO Group New Energy is:

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

0.10 = CN¥257m ÷ (CN¥5.1b - CN¥2.7b) (Based on the trailing twelve months to December 2021).

So, IRICO Group New Energy has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Electronic industry.

View our latest analysis for IRICO Group New Energy

roce
SEHK:438 Return on Capital Employed July 25th 2022

Above you can see how the current ROCE for IRICO Group New Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for IRICO Group New Energy.

So How Is IRICO Group New Energy's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 207% in that time. 10% is a pretty standard return, and it provides some comfort knowing that IRICO Group New Energy has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, IRICO Group New Energy has done well to reduce current liabilities to 52% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

In Conclusion...

The main thing to remember is that IRICO Group New Energy has proven its ability to continually reinvest at respectable rates of return. Yet over the last five years the stock has declined 34%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

If you want to know some of the risks facing IRICO Group New Energy we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

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.

Valuation is complex, but we're helping make it simple.

Find out whether IRICO Group New Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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