Returns Are Gaining Momentum At IRICO Group New Energy (HKG:438)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at IRICO Group New Energy (HKG:438) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for IRICO Group New Energy, this is the formula:

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

0.026 = CN¥113m ÷ (CN¥9.2b - CN¥4.9b) (Based on the trailing twelve months to June 2024).

So, IRICO Group New Energy has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.2%.

View our latest analysis for IRICO Group New Energy

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'd like to look at how IRICO Group New Energy has performed in the past in other metrics, you can view this free graph of IRICO Group New Energy's past earnings, revenue and cash flow.

What Can We Tell From IRICO Group New Energy's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 434% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 53%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that IRICO Group New Energy has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

To sum it up, IRICO Group New Energy has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has dived 75% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

IRICO Group New Energy does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.