GCL New Energy Holdings (HKG:451) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in GCL New Energy Holdings' (HKG:451) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on GCL New Energy Holdings is:

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

0.089 = CN¥1.1b ÷ (CN¥16b - CN¥3.6b) (Based on the trailing twelve months to December 2021).

Thus, GCL New Energy Holdings has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 6.7%.

View our latest analysis for GCL New Energy Holdings

Above you can see how the current ROCE for GCL New Energy Holdings 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 GCL New Energy Holdings.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at GCL New Energy Holdings. We found that the returns on capital employed over the last five years have risen by 85%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, GCL New Energy Holdings appears to been achieving more with less, since the business is using 48% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 23%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that GCL New Energy Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From GCL New Energy Holdings' ROCE

From what we've seen above, GCL New Energy Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 55% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 2 warning signs for GCL New Energy Holdings (1 can't be ignored) you should be aware of.

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. 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.