CGN Power's (HKG:1816) Returns Have Hit A Wall

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at CGN Power (HKG:1816) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for CGN Power, this is the formula:

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

0.071 = CN¥24b ÷ (CN¥422b - CN¥83b) (Based on the trailing twelve months to September 2024).

So, CGN Power has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.

View our latest analysis for CGN Power

Above you can see how the current ROCE for CGN Power compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CGN Power for free.

What Does the ROCE Trend For CGN Power Tell Us?

There hasn't been much to report for CGN Power's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if CGN Power doesn't end up being a multi-bagger in a few years time. This probably explains why CGN Power is paying out 46% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

What We Can Learn From CGN Power's ROCE

In a nutshell, CGN Power has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 93% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for CGN Power that we think you should be aware of.

While CGN Power 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.