- Hong Kong
- Renewable Energy
There's Been No Shortage Of Growth Recently For China Datang Corporation Renewable Power's (HKG:1798) Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in China Datang Corporation Renewable Power's (HKG:1798) returns on capital, so let's have a look.
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 China Datang Corporation Renewable Power, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = CN¥5.0b ÷ (CN¥95b - CN¥16b) (Based on the trailing twelve months to June 2022).
So, China Datang Corporation Renewable Power has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 6.6%.
Check out 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 here for free.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 59%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
One more thing to note, China Datang Corporation Renewable Power has decreased current liabilities to 17% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that China Datang Corporation Renewable Power has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On China Datang Corporation Renewable Power's ROCE
In summary, it's great to see that China Datang Corporation Renewable Power can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 208% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if China Datang Corporation Renewable Power can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 1 warning sign with China Datang Corporation Renewable Power and understanding this should be part of your investment process.
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.
China Datang Corporation Renewable Power
China Datang Corporation Renewable Power Co., Limited, together with its subsidiaries, generates and sells wind power and other renewable power in the People’s Republic of China.
Solid track record and fair value.