Here's What's Concerning About China Three Gorges Renewables (Group)Ltd's (SHSE:600905) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at China Three Gorges Renewables (Group)Ltd (SHSE:600905), it didn't seem to tick all of these boxes.

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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. Analysts use this formula to calculate it for China Three Gorges Renewables (Group)Ltd:

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

0.044 = CN¥13b ÷ (CN¥340b - CN¥53b) (Based on the trailing twelve months to September 2024).

Therefore, China Three Gorges Renewables (Group)Ltd has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.6%.

Check out our latest analysis for China Three Gorges Renewables (Group)Ltd

Above you can see how the current ROCE for China Three Gorges Renewables (Group)Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China Three Gorges Renewables (Group)Ltd .

So How Is China Three Gorges Renewables (Group)Ltd's ROCE Trending?

When we looked at the ROCE trend at China Three Gorges Renewables (Group)Ltd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.4% from 5.7% 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 China Three Gorges Renewables (Group)Ltd. These growth trends haven't led to growth returns though, since the stock has fallen 29% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for China Three Gorges Renewables (Group)Ltd (of which 1 makes us a bit uncomfortable!) that you should know about.

While China Three Gorges Renewables (Group)Ltd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.