What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 TCL Zhonghuan Renewable Energy TechnologyLtd is:

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

0.073 = CN¥7.4b ÷ (CN¥122b - CN¥21b) (Based on the trailing twelve months to June 2023).

Therefore, TCL Zhonghuan Renewable Energy TechnologyLtd has an ROCE of 7.3%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.1%.

See our latest analysis for TCL Zhonghuan Renewable Energy TechnologyLtd

Above you can see how the current ROCE for TCL Zhonghuan Renewable Energy TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering TCL Zhonghuan Renewable Energy TechnologyLtd here for free.

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.3%. The amount of capital employed has increased too, by 318%. So we're very much inspired by what we're seeing at TCL Zhonghuan Renewable Energy TechnologyLtd thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 17%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what TCL Zhonghuan Renewable Energy TechnologyLtd has. And a remarkable 396% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

On a separate note, we've found 2 warning signs for TCL Zhonghuan Renewable Energy TechnologyLtd you'll probably want to know about.

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

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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.