If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think China Three Gorges Renewables (Group)Ltd (SHSE:600905) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on China Three Gorges Renewables (Group)Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = CN¥9.2b ÷ (CN¥276b - CN¥46b) (Based on the trailing twelve months to December 2023).
Therefore, China Three Gorges Renewables (Group)Ltd has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.6%.
Above you can see how the current ROCE for China Three Gorges Renewables (Group)Ltd 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 China Three Gorges Renewables (Group)Ltd for free.
So How Is China Three Gorges Renewables (Group)Ltd's ROCE Trending?
On the surface, the trend of ROCE at China Three Gorges Renewables (Group)Ltd doesn't inspire confidence. Around five years ago the returns on capital were 5.7%, but since then they've fallen to 4.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for China Three Gorges Renewables (Group)Ltd. However, despite the promising trends, the stock has fallen 17% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a final note, we found 2 warning signs for China Three Gorges Renewables (Group)Ltd (1 is a bit unpleasant) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.