Slowing Rates Of Return At China Three Gorges Renewables (Group)Ltd (SHSE:600905) Leave Little Room For Excitement

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at China Three Gorges Renewables (Group)Ltd (SHSE:600905) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on China Three Gorges Renewables (Group)Ltd is:

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

0.045 = CN¥13b ÷ (CN¥325b - CN¥43b) (Based on the trailing twelve months to March 2024).

So, China Three Gorges Renewables (Group)Ltd has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.9%.

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 .

What Does the ROCE Trend For China Three Gorges Renewables (Group)Ltd Tell Us?

In terms of China Three Gorges Renewables (Group)Ltd's historical ROCE trend, it doesn't exactly demand attention. The company has employed 277% more capital in the last five years, and the returns on that capital have remained stable at 4.5%. 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.

The Bottom Line On China Three Gorges Renewables (Group)Ltd's ROCE

In conclusion, China Three Gorges Renewables (Group)Ltd has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 14% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing China Three Gorges Renewables (Group)Ltd we've found 2 warning signs (1 is significant!) 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.

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.