Slowing Rates Of Return At China Southern Power Grid Energy Efficiency & Clean Energy (SZSE:003035) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at China Southern Power Grid Energy Efficiency & Clean Energy (SZSE:003035) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

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

Thus, China Southern Power Grid Energy Efficiency & Clean Energy has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

Check out 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, you can check out the forecasts from the analysts covering China Southern Power Grid Energy Efficiency & Clean Energy for free.

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

There are better returns on capital out there than what we're seeing at China Southern Power Grid Energy Efficiency & Clean Energy. The company has employed 267% more capital in the last five years, and the returns on that capital have remained stable at 6.0%. 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.

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. Effectively suppliers now fund less of the business, which can lower some elements of risk.

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

In conclusion, China Southern Power Grid Energy Efficiency & Clean Energy has been investing more capital into the business, but returns on that capital haven't increased. And in the last three years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

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.