There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129) so let's look a bit deeper.

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. Analysts use this formula to calculate it for TCL Zhonghuan Renewable Energy TechnologyLtd:

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

0.08 = CN¥8.5b ÷ (CN¥127b - CN¥20b) (Based on the trailing twelve months to September 2023).

Thus, TCL Zhonghuan Renewable Energy TechnologyLtd has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 4.2% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for TCL Zhonghuan Renewable Energy TechnologyLtd

In the above chart we have measured TCL Zhonghuan Renewable Energy TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TCL Zhonghuan Renewable Energy TechnologyLtd here for free.

What Can We Tell From TCL Zhonghuan Renewable Energy TechnologyLtd's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.0%. The amount of capital employed has increased too, by 318%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, TCL Zhonghuan Renewable Energy TechnologyLtd has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. 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.

In Conclusion...

To sum it up, TCL Zhonghuan Renewable Energy TechnologyLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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.