What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Sichuan Xichang Electric PowerLtd (SHSE:600505) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sichuan Xichang Electric PowerLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = CN¥62m ÷ (CN¥4.5b - CN¥972m) (Based on the trailing twelve months to March 2024).
So, Sichuan Xichang Electric PowerLtd has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 5.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Xichang Electric PowerLtd's ROCE against it's prior returns. If you'd like to look at how Sichuan Xichang Electric PowerLtd has performed in the past in other metrics, you can view this free graph of Sichuan Xichang Electric PowerLtd's past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Sichuan Xichang Electric PowerLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.8% from 4.6% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
In summary, Sichuan Xichang Electric PowerLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 32% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with Sichuan Xichang Electric PowerLtd (including 2 which don't sit too well with us) .
While Sichuan Xichang Electric PowerLtd 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.