We Like These Underlying Return On Capital Trends At CGN New Energy Holdings (HKG:1811)

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So on that note, CGN New Energy Holdings (HKG:1811) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 CGN New Energy Holdings:

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

0.08 = US$512m ÷ (US$8.4b - US$2.0b) (Based on the trailing twelve months to June 2024).

So, CGN New Energy Holdings has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 6.9%.

View our latest analysis for CGN New Energy Holdings

In the above chart we have measured CGN New Energy Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CGN New Energy Holdings .

So How Is CGN New Energy Holdings' ROCE Trending?

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 8.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 85% more capital is being employed now too. So we're very much inspired by what we're seeing at CGN New Energy Holdings thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, CGN New Energy Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 136% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about CGN New Energy Holdings, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.