For investors seeking multi-bagger stocks, understanding the underlying trends in a business is paramount. One approach involves identifying companies with increasing returns on capital employed (ROCE) alongside growing capital employed, indicating a compounding ability to reinvest earnings and generate higher returns. Notably, Hunan Yuneng New Energy Battery Material Ltd (SZSE:301358) exhibits noteworthy changes in its returns on capital, warranting closer inspection.
Return On Capital Employed (ROCE) Explained: ROCE measures a company’s pre-tax profit generated from capital employed in its business. For Hunan Yuneng New Energy Battery Material Ltd, the formula is as follows:
ROCE = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
With earnings of CN¥3.6 billion over the trailing twelve months to September 2023, and total assets of CN¥27 billion minus current liabilities of CN¥13 billion, the calculation yields an ROCE of 25%. This return significantly surpasses the industry average of 6.4%.
Analyzing Hunan Yuneng New Energy Battery Material Ltd’s ROCE Trend: Investors can find encouragement in Hunan Yuneng New Energy Battery Material Ltd’s recent performance. Over the past four years, the company has demonstrated substantial growth in returns on capital employed, reaching 25%. Notably, the company effectively generates more profit per dollar of capital utilized, with capital deployment witnessing a significant 2,500% increase. This ability to profitably reinvest capital underscores the company’s promising trajectory.
However, it’s crucial to note a notable increase in the company’s current liabilities during this period. This suggests that suppliers or short-term creditors now fund 47% of the business, a higher proportion compared to four years ago, potentially influencing the ROCE growth.
Key Takeaways on Hunan Yuneng New Energy Battery Material Ltd’s ROCE: The ability to enhance returns on capital while consistently reinvesting in the business is a desirable trait, evident in Hunan Yuneng New Energy Battery Material Ltd’s performance. Despite a 26% decline in stock value over the past year, astute investors may find potential opportunities here. Conducting further research to assess the sustainability of these trends is advisable.
However, it’s essential to acknowledge associated risks, as highlighted by 3 warning signs (and 1 concerning) related to Hunan Yuneng New Energy Battery Material Ltd. For investors seeking high-return stocks with solid balance sheets, exploring this free list may prove beneficial.