China Southern Power Grid TechnologyLtd (SHSE:688248) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in China Southern Power Grid TechnologyLtd's (SHSE:688248) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for China Southern Power Grid TechnologyLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = CN¥392m ÷ (CN¥4.2b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Thus, China Southern Power Grid TechnologyLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Construction industry.

View our latest analysis for China Southern Power Grid TechnologyLtd

Above you can see how the current ROCE for China Southern Power Grid TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for China Southern Power Grid TechnologyLtd .

So How Is China Southern Power Grid TechnologyLtd's ROCE Trending?

China Southern Power Grid TechnologyLtd is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 667%. So we're very much inspired by what we're seeing at China Southern Power Grid TechnologyLtd thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 25%, which basically reduces it's funding from the likes of short-term creditors or suppliers. 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.

What We Can Learn From China Southern Power Grid TechnologyLtd's ROCE

All in all, it's terrific to see that China Southern Power Grid TechnologyLtd is reaping the rewards from prior investments and is growing its capital base. And with a respectable 35% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 688248 on our platform that is definitely worth checking out.

While China Southern Power Grid TechnologyLtd 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.