GCL New Energy Holdings (HKG:451) experiences growth in capital returns

What trends should we look for if we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. Speaking of which, we’ve noticed big changes in GCL New Energy Holdings’ (HKG:451) returns on capital, so let’s take a look.

Return on capital employed (ROCE): what is it?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on GCL New Energy Holdings is:

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

0.089 = CN¥1.1b ÷ (CN¥16b – CN¥3.6b) (Based on the last twelve months to December 2021).

Thereby, GCL New Energy Holdings has a ROCE of 8.9%. In absolute terms, that’s a low return, but it’s far better than the renewables industry average of 6.7%.

Check out our latest analysis for GCL New Energy Holdings

SEHK:451 Return on Capital Employed July 16, 2022

Above, you can see how GCL New Energy Holdings’ current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you want to see what analysts are predicting for the future, you should check out our free report for GCL New Energy Holdings.

The ROCE trend

You would be hard pressed not to be impressed by the ROCE trend at GCL New Energy Holdings. We have found that returns on capital employed over the past five years have increased by 85%. This is not bad, because it indicates that for every dollar invested (capital employed), the company increases the amount earned from that dollar. In terms of capital employed, GCL New Energy Holdings appears to be achieving more with less, as the company uses 48% less capital to run its operations. A company that shrinks its asset base like this is usually not typical of a company that will soon be multi-bagger.

In another part of our analysis, we noticed that the ratio of current liabilities to total assets of the company has decreased to 23%, which overall means that the company relies less on its suppliers or creditors. in the short term to finance its operations. This tells us that GCL New Energy Holdings has increased its returns without depending on the increase in its current liabilities, which we are very pleased with.

What we can learn from GCL New Energy Holdings ROCE

From what we have seen above, GCL New Energy Holdings has managed to increase its return on capital while reducing its capital base. Given that the stock has fallen 55% in the last five years, it could be a good investment if the valuation and other metrics are also attractive. With that in mind, we believe the promising trends warrant further investigation of this stock.

Finally we found 2 warning signs for GCL New Energy Holdings (1 cannot be ignored) which you should be aware of.

For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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