Here's What's Concerning About China Southern Power Grid Energy Storage's (SHSE:600995) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 Southern Power Grid Energy Storage (SHSE:600995) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Southern Power Grid Energy Storage:

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

0.049 = CN¥2.3b ÷ (CN¥49b - CN¥1.8b) (Based on the trailing twelve months to September 2024).

Thus, China Southern Power Grid Energy Storage has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.

Check out our latest analysis for China Southern Power Grid Energy Storage

Above you can see how the current ROCE for China Southern Power Grid Energy Storage compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Southern Power Grid Energy Storage for free.

What Does the ROCE Trend For China Southern Power Grid Energy Storage Tell Us?

On the surface, the trend of ROCE at China Southern Power Grid Energy Storage doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.9% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, China Southern Power Grid Energy Storage has done well to pay down its current liabilities to 3.7% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by China Southern Power Grid Energy Storage's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about China Southern Power Grid Energy Storage, we've spotted 2 warning signs, and 1 of them can't be ignored.

While China Southern Power Grid Energy Storage isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.