Returns On Capital At Shenzhen Energy Group (SZSE:000027) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Shenzhen Energy Group (SZSE:000027) 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. To calculate this metric for Shenzhen Energy Group, this is the formula:

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

0.048 = CN¥6.3b ÷ (CN¥162b - CN¥33b) (Based on the trailing twelve months to June 2024).

Thus, Shenzhen Energy Group has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 5.6%.

Check out our latest analysis for Shenzhen Energy Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Energy Group's ROCE against it's prior returns. If you'd like to look at how Shenzhen Energy Group has performed in the past in other metrics, you can view this free graph of Shenzhen Energy Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Shenzhen Energy Group. The company has employed 94% more capital in the last five years, and the returns on that capital have remained stable at 4.8%. 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 Key Takeaway

As we've seen above, Shenzhen Energy Group's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 42% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Shenzhen Energy Group we've found 5 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While Shenzhen Energy Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.