There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at CBAK Energy Technology (NASDAQ:CBAT) and its trend of ROCE, we really liked what we saw.
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 CBAK Energy Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$17m ÷ (US$293m – US$154m) (Based on the trailing twelve months to September 2024).
So, CBAK Energy Technology has an ROCE of 12%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Electrical industry average of 11%.
View our latest analysis for CBAK Energy Technology
NasdaqCM:CBAT Return on Capital Employed December 26th 2024
In the above chart we have measured CBAK Energy Technology’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for CBAK Energy Technology .
We’re delighted to see that CBAK Energy Technology is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it’s now earning 12% on its capital. And unsurprisingly, like most companies trying to break into the black, CBAK Energy Technology is utilizing 310% 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.
One more thing to note, CBAK Energy Technology has decreased current liabilities to 53% 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. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
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