The Returns At Hangzhou Turbine Power Group (SZSE:200771) Aren't Growing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 investigating Hangzhou Turbine Power Group (SZSE:200771), we don't think it's current trends fit the mold of a multi-bagger.

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 Hangzhou Turbine Power Group, this is the formula:

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

0.036 = CN¥370m ÷ (CN¥16b - CN¥5.9b) (Based on the trailing twelve months to June 2024).

So, Hangzhou Turbine Power Group has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

See our latest analysis for Hangzhou Turbine Power Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Turbine Power Group's ROCE against it's prior returns. If you'd like to look at how Hangzhou Turbine Power Group has performed in the past in other metrics, you can view this free graph of Hangzhou Turbine Power Group's past earnings, revenue and cash flow.

What Can We Tell From Hangzhou Turbine Power Group's ROCE Trend?

In terms of Hangzhou Turbine Power Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.6% for the last five years, and the capital employed within the business has risen 33% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while Hangzhou Turbine Power Group has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 106% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Hangzhou Turbine Power Group we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Hangzhou Turbine Power Group 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.