Guangdong Meiyanjixiang HydropowerLtd (SHSE:600868) Might Have The Makings Of A Multi-Bagger

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Guangdong Meiyanjixiang HydropowerLtd (SHSE:600868) and its trend of ROCE, we really liked what we saw.

What Is 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 Guangdong Meiyanjixiang HydropowerLtd is:

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

0.022 = CN¥58m ÷ (CN¥2.9b - CN¥274m) (Based on the trailing twelve months to September 2023).

Therefore, Guangdong Meiyanjixiang HydropowerLtd has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.0%.

View our latest analysis for Guangdong Meiyanjixiang HydropowerLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Meiyanjixiang HydropowerLtd'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 Guangdong Meiyanjixiang HydropowerLtd.

What Does the ROCE Trend For Guangdong Meiyanjixiang HydropowerLtd Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 258% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To bring it all together, Guangdong Meiyanjixiang HydropowerLtd has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 63% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 600868 on our platform that is definitely worth checking out.

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.