Returns On Capital Signal Tricky Times Ahead For China Southern Power Grid Energy Efficiency & Clean Energy (SZSE:003035)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at China Southern Power Grid Energy Efficiency & Clean Energy (SZSE:003035), it didn't seem to tick all of these boxes.

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. 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)

0.027 = CN¥447m ÷ (CN¥20b - CN¥3.7b) (Based on the trailing twelve months to September 2024).

Therefore, China Southern Power Grid Energy Efficiency & Clean Energy has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.3%.

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

In the above chart we have measured China Southern Power Grid Energy Efficiency & Clean Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Southern Power Grid Energy Efficiency & Clean Energy .

What The Trend Of ROCE Can Tell Us

In terms of China Southern Power Grid Energy Efficiency & Clean Energy's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.8% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by China Southern Power Grid Energy Efficiency & Clean Energy's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 49% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

China Southern Power Grid Energy Efficiency & Clean Energy does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.