Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Delixi New Energy Technology (SHSE:603032) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Delixi New Energy Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥207m ÷ (CN¥1.7b - CN¥151m) (Based on the trailing twelve months to September 2023).
So, Delixi New Energy Technology has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.1% it's much better.
Check out our latest analysis for Delixi New Energy Technology
Above you can see how the current ROCE for Delixi New Energy Technology 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 Delixi New Energy Technology here for free.
What Can We Tell From Delixi New Energy Technology's ROCE Trend?
We're delighted to see that Delixi New Energy Technology is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 13% on its capital. And unsurprisingly, like most companies trying to break into the black, Delixi New Energy Technology is utilizing 244% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
Our Take On Delixi New Energy Technology's ROCE
In summary, it's great to see that Delixi New Energy Technology has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 11% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One more thing, we've spotted 1 warning sign facing Delixi New Energy Technology that you might find interesting.
While Delixi New Energy Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.