Investors Met With Slowing Returns on Capital At SDIC Power Holdings (SHSE:600886)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think SDIC Power Holdings (SHSE:600886) 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)

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 SDIC Power Holdings, this is the formula:

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

0.076 = CN¥18b ÷ (CN¥289b - CN¥46b) (Based on the trailing twelve months to September 2024).

Therefore, SDIC Power Holdings has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 5.6% generated by the Renewable Energy industry, it's much better.

Check out our latest analysis for SDIC Power Holdings

Above you can see how the current ROCE for SDIC Power Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for SDIC Power Holdings .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at SDIC Power Holdings. The company has employed 23% more capital in the last five years, and the returns on that capital have remained stable at 7.6%. 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.

What We Can Learn From SDIC Power Holdings' ROCE

In conclusion, SDIC Power Holdings has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 97% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing SDIC Power Holdings we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.