Chongqing Three Gorges Water Conservancy and Electric Power (SHSE:600116) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Chongqing Three Gorges Water Conservancy and Electric Power (SHSE:600116) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Chongqing Three Gorges Water Conservancy and Electric Power:

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

0.046 = CN¥740m ÷ (CN¥24b - CN¥8.0b) (Based on the trailing twelve months to June 2024).

So, Chongqing Three Gorges Water Conservancy and Electric Power has an ROCE of 4.6%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.

View our latest analysis for Chongqing Three Gorges Water Conservancy and Electric Power

In the above chart we have measured Chongqing Three Gorges Water Conservancy and Electric Power's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Chongqing Three Gorges Water Conservancy and Electric Power for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Chongqing Three Gorges Water Conservancy and Electric Power. Over the past five years, ROCE has remained relatively flat at around 4.6% and the business has deployed 294% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 33% of total assets, this reported ROCE would probably be less than4.6% because total capital employed would be higher.The 4.6% ROCE could be even lower if current liabilities weren't 33% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line On Chongqing Three Gorges Water Conservancy and Electric Power's ROCE

In summary, Chongqing Three Gorges Water Conservancy and Electric Power has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 3 warning signs with Chongqing Three Gorges Water Conservancy and Electric Power and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.