Investors Met With Slowing Returns on Capital At Sichuan Energy Investment Development (HKG:1713)

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Sichuan Energy Investment Development (HKG:1713), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Sichuan Energy Investment Development, this is the formula:

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

0.093 = CN¥478m ÷ (CN¥7.4b - CN¥2.2b) (Based on the trailing twelve months to December 2024).

Therefore, Sichuan Energy Investment Development has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 4.6% generated by the Electric Utilities industry, it's much better.

View our latest analysis for Sichuan Energy Investment Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Energy Investment Development's ROCE against it's prior returns. If you're interested in investigating Sichuan Energy Investment Development's past further, check out this free graph covering Sichuan Energy Investment Development's past earnings, revenue and cash flow.

What Does the ROCE Trend For Sichuan Energy Investment Development Tell Us?

There are better returns on capital out there than what we're seeing at Sichuan Energy Investment Development. Over the past five years, ROCE has remained relatively flat at around 9.3% and the business has deployed 70% more capital into its operations. 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

In conclusion, Sichuan Energy Investment Development has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 386% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Sichuan Energy Investment Development does have some risks though, and we've spotted 1 warning sign for Sichuan Energy Investment Development that you might be interested in.

While Sichuan Energy Investment Development 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.