Investors Met With Slowing Returns on Capital At China Datang Corporation Renewable Power (HKG:1798)

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. 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 China Datang Corporation Renewable Power (HKG:1798), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for China Datang Corporation Renewable Power:

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

0.065 = CN¥5.4b ÷ (CN¥102b - CN¥19b) (Based on the trailing twelve months to December 2023).

Thus, China Datang Corporation Renewable Power has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 7.0%.

View our latest analysis for China Datang Corporation Renewable Power

In the above chart we have measured China Datang Corporation Renewable Power's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Datang Corporation Renewable Power for free.

So How Is China Datang Corporation Renewable Power's ROCE Trending?

The returns on capital haven't changed much for China Datang Corporation Renewable Power in recent years. The company has consistently earned 6.5% for the last five years, and the capital employed within the business has risen 54% in that time. 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 summary, China Datang Corporation Renewable Power has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 114% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 2 warning signs we've spotted with China Datang Corporation Renewable Power (including 1 which is potentially serious) .

While China Datang Corporation Renewable Power 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.