What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at China Resources Power Holdings (HKG:836) and its ROCE trend, we weren't exactly thrilled.
Understanding 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 China Resources Power Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = HK$15b ÷ (HK$311b - HK$88b) (Based on the trailing twelve months to June 2023).
Thus, China Resources Power Holdings has an ROCE of 6.9%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 6.3%.
In the above chart we have measured China Resources Power Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Resources Power Holdings.
How Are Returns Trending?
In terms of China Resources Power Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.7% over the last five years. However it looks like China Resources Power Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
To conclude, we've found that China Resources Power Holdings is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 38% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you want to know some of the risks facing China Resources Power Holdings we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
While China Resources Power Holdings 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.