Sichuan Xichang Electric PowerLtd (SHSE:600505) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sichuan Xichang Electric PowerLtd (SHSE:600505) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Sichuan Xichang Electric PowerLtd, this is the formula:

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

0.017 = CN¥61m ÷ (CN¥4.6b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Thus, Sichuan Xichang Electric PowerLtd has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 6.3%.

View our latest analysis for Sichuan Xichang Electric PowerLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Xichang Electric PowerLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sichuan Xichang Electric PowerLtd.

What Does the ROCE Trend For Sichuan Xichang Electric PowerLtd Tell Us?

When we looked at the ROCE trend at Sichuan Xichang Electric PowerLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.7% from 6.5% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sichuan Xichang Electric PowerLtd. In light of this, the stock has only gained 11% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, Sichuan Xichang Electric PowerLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.