Investors Met With Slowing Returns on Capital At GuiZhou QianYuan Power (SZSE:002039)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think GuiZhou QianYuan Power (SZSE:002039) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for GuiZhou QianYuan Power:

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

0.07 = CN¥901m ÷ (CN¥16b - CN¥3.1b) (Based on the trailing twelve months to March 2024).

Therefore, GuiZhou QianYuan Power has an ROCE of 7.0%. On its own, that's a low figure but it's around the 5.9% average generated by the Renewable Energy industry.

See our latest analysis for GuiZhou QianYuan Power

In the above chart we have measured GuiZhou QianYuan Power's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for GuiZhou QianYuan Power .

How Are Returns Trending?

There hasn't been much to report for GuiZhou QianYuan Power's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at GuiZhou QianYuan Power in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On GuiZhou QianYuan Power's ROCE

We can conclude that in regards to GuiZhou QianYuan Power's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 86% 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 GuiZhou QianYuan Power (1 doesn't sit too well with us) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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