Investors Met With Slowing Returns on Capital At CECEP Solar EnergyLtd (SZSE:000591)

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 CECEP Solar EnergyLtd (SZSE:000591) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for CECEP Solar EnergyLtd, this is the formula:

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

0.056 = CN¥2.3b ÷ (CN¥49b - CN¥7.0b) (Based on the trailing twelve months to September 2024).

Therefore, CECEP Solar EnergyLtd has an ROCE of 5.6%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

See our latest analysis for CECEP Solar EnergyLtd

Above you can see how the current ROCE for CECEP Solar EnergyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CECEP Solar EnergyLtd .

What Does the ROCE Trend For CECEP Solar EnergyLtd Tell Us?

There are better returns on capital out there than what we're seeing at CECEP Solar EnergyLtd. The company has employed 38% more capital in the last five years, and the returns on that capital have remained stable at 5.6%. 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.

The Bottom Line

As we've seen above, CECEP Solar EnergyLtd's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 53% 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.

CECEP Solar EnergyLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While CECEP Solar EnergyLtd 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.