Returns Are Gaining Momentum At Zhejiang Zheneng Electric Power (SHSE:600023)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Zhejiang Zheneng Electric Power (SHSE:600023) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Zhejiang Zheneng Electric Power is:

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

0.055 = CN¥6.4b ÷ (CN¥153b - CN¥36b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Zheneng Electric Power has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 5.6%.

Check out our latest analysis for Zhejiang Zheneng Electric Power

In the above chart we have measured Zhejiang Zheneng Electric Power'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 Zhejiang Zheneng Electric Power .

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.5%. The amount of capital employed has increased too, by 22%. So we're very much inspired by what we're seeing at Zhejiang Zheneng Electric Power thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 24% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Zhejiang Zheneng Electric Power's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Zhejiang Zheneng Electric Power has. Since the stock has returned a solid 79% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Zhejiang Zheneng Electric Power, we've discovered 1 warning sign that you should be aware of.

While Zhejiang Zheneng Electric Power 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.