Investors Met With Slowing Returns on Capital At Hangzhou Cogeneration Group (SHSE:605011)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Hangzhou Cogeneration Group (SHSE:605011) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Hangzhou Cogeneration Group is:

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

0.07 = CN¥223m ÷ (CN¥4.0b - CN¥829m) (Based on the trailing twelve months to September 2024).

So, Hangzhou Cogeneration Group has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.1% generated by the Electric Utilities industry, it's much better.

See our latest analysis for Hangzhou Cogeneration Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Cogeneration Group's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hangzhou Cogeneration Group.

What Can We Tell From Hangzhou Cogeneration Group's ROCE Trend?

There are better returns on capital out there than what we're seeing at Hangzhou Cogeneration Group. Over the past five years, ROCE has remained relatively flat at around 7.0% and the business has deployed 33% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Hangzhou Cogeneration Group has done well to reduce current liabilities to 21% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In conclusion, Hangzhou Cogeneration Group has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 19% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Hangzhou Cogeneration Group does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Hangzhou Cogeneration Group 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.