Shenzhen Energy Group's (SZSE:000027) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shenzhen Energy Group (SZSE:000027), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Shenzhen Energy Group is:

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

0.053 = CN¥6.7b ÷ (CN¥162b - CN¥36b) (Based on the trailing twelve months to March 2024).

So, Shenzhen Energy Group has an ROCE of 5.3%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 5.9%.

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're interested in investigating Shenzhen Energy Group's past further, check out this free graph covering Shenzhen Energy Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Energy Group Tell Us?

There are better returns on capital out there than what we're seeing at Shenzhen Energy Group. The company has employed 90% more capital in the last five years, and the returns on that capital have remained stable at 5.3%. 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.

What We Can Learn From Shenzhen Energy Group's ROCE

In conclusion, Shenzhen Energy Group has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 65% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Shenzhen Energy Group does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

While Shenzhen Energy 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.

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