The Returns On Capital At China Three Gorges Renewables (Group)Ltd (SHSE:600905) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at China Three Gorges Renewables (Group)Ltd (SHSE:600905) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Three Gorges Renewables (Group)Ltd, this is the formula:

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

0.04 = CN¥9.2b ÷ (CN¥276b - CN¥46b) (Based on the trailing twelve months to December 2023).

So, China Three Gorges Renewables (Group)Ltd has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.8%.

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

In the above chart we have measured China Three Gorges Renewables (Group)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Three Gorges Renewables (Group)Ltd .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at China Three Gorges Renewables (Group)Ltd doesn't inspire confidence. Around five years ago the returns on capital were 5.7%, but since then they've fallen to 4.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that China Three Gorges Renewables (Group)Ltd is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 15% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 2 warning signs for China Three Gorges Renewables (Group)Ltd (1 is concerning) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.