What We Make Of CGN Power's (HKG:1816) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 when we looked at CGN Power (HKG:1816) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.073 = CN¥23b ÷ (CN¥384b - CN¥67b) (Based on the trailing twelve months to September 2020).

Thus, CGN Power has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.5%.

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 to see what analysts are forecasting going forward, you should check out our free report for CGN Power.

What Does the ROCE Trend For CGN Power Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.3%. The amount of capital employed has increased too, by 52%. So we're very much inspired by what we're seeing at CGN Power thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, CGN Power has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 34% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 2 warning signs with CGN Power (at least 1 which can't be ignored) , and understanding these would certainly be useful.

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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