China Southern Power Grid Energy Storage (SHSE:600995) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at China Southern Power Grid Energy Storage (SHSE:600995), it didn't seem to tick all of these boxes.

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. The formula for this calculation on China Southern Power Grid Energy Storage is:

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

0.057 = CN¥2.2b ÷ (CN¥44b - CN¥4.4b) (Based on the trailing twelve months to September 2023).

Thus, China Southern Power Grid Energy Storage has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

View our latest analysis for China Southern Power Grid Energy Storage

In the above chart we have measured China Southern Power Grid Energy Storage'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 Southern Power Grid Energy Storage .

What Can We Tell From China Southern Power Grid Energy Storage's ROCE Trend?

We weren't thrilled with the trend because China Southern Power Grid Energy Storage's ROCE has reduced by 64% over the last five years, while the business employed 1,509% more capital. Usually this isn't ideal, but given China Southern Power Grid Energy Storage conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with China Southern Power Grid Energy Storage's earnings and if they change as a result from the capital raise.

The Bottom Line On China Southern Power Grid Energy Storage's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for China Southern Power Grid Energy Storage have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 32% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you're still interested in China Southern Power Grid Energy Storage it's worth checking out our FREE intrinsic value approximation for 600995 to see if it's trading at an attractive price in other respects.

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.