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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at China Three Gorges Renewables (Group)Ltd (SHSE:600905) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for China Three Gorges Renewables (Group)Ltd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = CN¥12b ÷ (CN¥284b - CN¥42b) (Based on the trailing twelve months to September 2023).
Therefore, China Three Gorges Renewables (Group)Ltd has an ROCE of 5.1%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 5.6%.
Check out our latest analysis for China Three Gorges Renewables (Group)Ltd
In the above chart we have measured China Three Gorges Renewables (Group)Ltd'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 report on analyst forecasts for the company.
The Trend Of ROCE
The returns on capital haven't changed much for China Three Gorges Renewables (Group)Ltd in recent years. Over the past five years, ROCE has remained relatively flat at around 5.1% and the business has deployed 249% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On China Three Gorges Renewables (Group)Ltd's ROCE
Long story short, while China Three Gorges Renewables (Group)Ltd has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 16% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you'd like to know more about China Three Gorges Renewables (Group)Ltd, we've spotted 3 warning signs, and 1 of them is potentially serious.
While China Three Gorges Renewables (Group)Ltd 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.