Tonking New Energy Group Holdings (HKG:8326) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Tonking New Energy Group Holdings' (HKG:8326) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Tonking New Energy Group Holdings is:

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

0.095 = HK$22m ÷ (HK$448m - HK$215m) (Based on the trailing twelve months to December 2022).

Thus, Tonking New Energy Group Holdings has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 7.2%.

Check out our latest analysis for Tonking New Energy Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tonking New Energy Group Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tonking New Energy Group Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Tonking New Energy Group Holdings is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 33% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

One more thing to note, Tonking New Energy Group Holdings has decreased current liabilities to 48% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Tonking New Energy Group Holdings 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 Bottom Line

To sum it up, Tonking New Energy Group Holdings is collecting higher returns from the same amount of capital, and that's impressive. However the stock is down a substantial 72% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you want to know some of the risks facing Tonking New Energy Group Holdings we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While Tonking New Energy Group Holdings 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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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.