Will The ROCE Trend At Sichuan Energy Investment Development (HKG:1713) Continue?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Sichuan Energy Investment Development (HKG:1713) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Sichuan Energy Investment Development is:

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

0.098 = CN¥282m ÷ (CN¥4.6b - CN¥1.7b) (Based on the trailing twelve months to June 2020).

So, Sichuan Energy Investment Development has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Electric Utilities industry average of 4.8%.

Check out 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'd like to look at how Sichuan Energy Investment Development has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Sichuan Energy Investment Development has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 44% over the last four years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Sichuan Energy Investment Development's ROCE

In summary, we're delighted to see that Sichuan Energy Investment Development has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 35% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 1 warning sign for Sichuan Energy Investment Development that we think 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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