The Return Trends At IRICO Group New Energy (HKG:438) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in IRICO Group New Energy's (HKG:438) returns on capital, so let's have a 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 IRICO Group New Energy:

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

0.17 = CN¥430m ÷ (CN¥5.2b - CN¥2.7b) (Based on the trailing twelve months to June 2021).

So, IRICO Group New Energy has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.5% it's much better.

See our latest analysis for IRICO Group New Energy

In the above chart we have measured IRICO Group New Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for IRICO Group New Energy.

How Are Returns Trending?

We're delighted to see that IRICO Group New Energy is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 17% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, IRICO Group New Energy is utilizing 378% more capital than it was five years ago. 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 51% 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.

What We Can Learn From IRICO Group New Energy's ROCE

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. And a remarkable 115% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 3 warning signs with IRICO Group New Energy (at least 2 which are potentially serious) , and understanding these would certainly be useful.

While IRICO Group New Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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