There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at Central New Energy Holding Group (HKG:1735) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Central New Energy Holding Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = HK$82m ÷ (HK$3.5b - HK$1.9b) (Based on the trailing twelve months to December 2023).
Therefore, Central New Energy Holding Group has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Central New Energy Holding Group's ROCE against it's prior returns. If you'd like to look at how Central New Energy Holding Group has performed in the past in other metrics, you can view this free graph of Central New Energy Holding Group's past earnings, revenue and cash flow.
So How Is Central New Energy Holding Group's ROCE Trending?
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 numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 817% more capital is being employed now too. So we're very much inspired by what we're seeing at Central New Energy Holding Group thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line On Central New Energy Holding Group's ROCE
All in all, it's terrific to see that Central New Energy Holding Group is reaping the rewards from prior investments and is growing its capital base. And a remarkable 3,845% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know more about Central New Energy Holding Group, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.
While Central New Energy Holding Group 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.