Here's What To Make Of Jilin Electric PowerLtd's (SZSE:000875) Decelerating Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Jilin Electric PowerLtd (SZSE:000875), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Jilin Electric PowerLtd, this is the formula:

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

0.054 = CN¥3.4b ÷ (CN¥81b - CN¥19b) (Based on the trailing twelve months to September 2024).

Thus, Jilin Electric PowerLtd has an ROCE of 5.4%. 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 Jilin Electric PowerLtd

Above you can see how the current ROCE for Jilin Electric PowerLtd 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 Jilin Electric PowerLtd .

So How Is Jilin Electric PowerLtd's ROCE Trending?

The returns on capital haven't changed much for Jilin Electric PowerLtd in recent years. The company has employed 116% more capital in the last five years, and the returns on that capital have remained stable at 5.4%. 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 Key Takeaway

Long story short, while Jilin Electric PowerLtd has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 91% 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.

On a final note, we found 2 warning signs for Jilin Electric PowerLtd (1 is concerning) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.