Returns At IRICO Group New Energy (HKG:438) Are On The Way Up

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, IRICO Group New Energy (HKG:438) looks quite promising in regards to its trends of return on capital.

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

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. 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)

0.15 = CN¥314m ÷ (CN¥5.0b - CN¥2.8b) (Based on the trailing twelve months to December 2020).

Thus, IRICO Group New Energy has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Electronic industry.

Check out our latest analysis for IRICO Group New Energy

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For IRICO Group New Energy Tell Us?

IRICO Group New Energy has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 15% which is a sight for sore eyes. In addition to that, IRICO Group New Energy is employing 331% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, IRICO Group New Energy has decreased current liabilities to 57% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. 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. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Key Takeaway

In summary, it's great to see that IRICO Group New Energy has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 140% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

IRICO Group New Energy does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

While IRICO Group New Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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