Here's What's Concerning About Sany Renewable EnergyLtd's (SHSE:688349) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Sany Renewable EnergyLtd (SHSE:688349), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for Sany Renewable EnergyLtd:

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

0.0098 = CN¥165m ÷ (CN¥37b - CN¥20b) (Based on the trailing twelve months to September 2024).

Thus, Sany Renewable EnergyLtd has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

Check out our latest analysis for Sany Renewable EnergyLtd

In the above chart we have measured Sany Renewable EnergyLtd's 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 analyst report for Sany Renewable EnergyLtd .

The Trend Of ROCE

In terms of Sany Renewable EnergyLtd's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 1.0% from 55% four years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Sany Renewable EnergyLtd has done well to pay down its current liabilities to 55% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sany Renewable EnergyLtd. Furthermore the stock has climbed 13% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 2 warning signs we've spotted with Sany Renewable EnergyLtd (including 1 which doesn't sit too well with us) .

While Sany Renewable EnergyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.