Zhejiang Zheneng Electric Power (SHSE:600023) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. However, after briefly looking over the numbers, we don't think Zhejiang Zheneng Electric Power (SHSE:600023) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Zhejiang Zheneng Electric Power:

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

0.013 = CN¥1.5b ÷ (CN¥147b - CN¥32b) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Zheneng Electric Power has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.0%.

See 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 .

What Does the ROCE Trend For Zhejiang Zheneng Electric Power Tell Us?

On the surface, the trend of ROCE at Zhejiang Zheneng Electric Power doesn't inspire confidence. To be more specific, ROCE has fallen from 4.1% over the last five years. However it looks like Zhejiang Zheneng Electric Power might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Zhejiang Zheneng Electric Power's ROCE

To conclude, we've found that Zhejiang Zheneng Electric Power is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 59% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Zhejiang Zheneng Electric Power could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 600023 on our platform quite valuable.

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.