We Like These Underlying Return On Capital Trends At Zhejiang Zheneng Electric Power (SHSE:600023)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. With that in mind, we've noticed some promising trends at Zhejiang Zheneng Electric Power (SHSE:600023) so let's look a bit deeper.

Understanding 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. To calculate this metric for Zhejiang Zheneng Electric Power, this is the formula:

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

0.054 = CN¥6.3b ÷ (CN¥148b - CN¥30b) (Based on the trailing twelve months to March 2024).

So, Zhejiang Zheneng Electric Power has an ROCE of 5.4%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 5.9%.

See our latest analysis for Zhejiang Zheneng Electric Power

Above you can see how the current ROCE for Zhejiang Zheneng Electric Power 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 Zhejiang Zheneng Electric Power .

So How Is Zhejiang Zheneng Electric Power's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital 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.

The Bottom Line

In summary, it's great to see that Zhejiang Zheneng Electric Power can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 91% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Zhejiang Zheneng Electric Power can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Zhejiang Zheneng Electric Power that you might find interesting.

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.