Return Trends At Beijing Jingneng Power (SHSE:600578) Aren't Appealing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Beijing Jingneng Power (SHSE:600578) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Beijing Jingneng Power is:

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

0.038 = CN¥2.6b ÷ (CN¥92b - CN¥23b) (Based on the trailing twelve months to September 2024).

Thus, Beijing Jingneng Power has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.6%.

View our latest analysis for Beijing Jingneng Power

In the above chart we have measured Beijing Jingneng Power's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Beijing Jingneng Power .

What Does the ROCE Trend For Beijing Jingneng Power Tell Us?

Things have been pretty stable at Beijing Jingneng Power, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Beijing Jingneng Power doesn't end up being a multi-bagger in a few years time.

The Key Takeaway

In summary, Beijing Jingneng Power isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 30% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Beijing Jingneng Power (of which 1 is concerning!) that you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.