China Southern Power Grid Energy Efficiency & Clean Energy (SZSE:003035) Hasn't Managed To Accelerate Its Returns

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating China Southern Power Grid Energy Efficiency & Clean Energy (SZSE:003035), we don't think it's current trends fit the mold of a multi-bagger.

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 China Southern Power Grid Energy Efficiency & Clean Energy is:

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

0.06 = CN¥816m ÷ (CN¥17b - CN¥3.4b) (Based on the trailing twelve months to June 2023).

Therefore, China Southern Power Grid Energy Efficiency & Clean Energy has an ROCE of 6.0%. On its own that's a low return, but compared to the average of 4.8% generated by the Commercial Services industry, it's much better.

See our latest analysis for China Southern Power Grid Energy Efficiency & Clean Energy

Above you can see how the current ROCE for China Southern Power Grid Energy Efficiency & Clean Energy 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 Energy Efficiency & Clean Energy .

So How Is China Southern Power Grid Energy Efficiency & Clean Energy's ROCE Trending?

The returns on capital haven't changed much for China Southern Power Grid Energy Efficiency & Clean Energy in recent years. The company has consistently earned 6.0% for the last five years, and the capital employed within the business has risen 267% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, China Southern Power Grid Energy Efficiency & Clean Energy has done well to reduce current liabilities to 20% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From China Southern Power Grid Energy Efficiency & Clean Energy's ROCE

Long story short, while China Southern Power Grid Energy Efficiency & Clean Energy has been reinvesting its capital, the returns that it's generating haven't increased. And in the last three years, the stock has given away 55% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 1 warning sign for China Southern Power Grid Energy Efficiency & Clean Energy you'll probably want to know about.

While China Southern Power Grid Energy Efficiency & Clean Energy 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.

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