CLP Holdings (HKG:2) May Have Issues Allocating Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into CLP Holdings (HKG:2), the trends above didn't look too great.

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 CLP Holdings:

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

0.06 = HK$12b ÷ (HK$240b - HK$38b) (Based on the trailing twelve months to December 2021).

Thus, CLP Holdings has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 5.2%.

View our latest analysis for CLP Holdings

In the above chart we have measured CLP Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is CLP Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at CLP Holdings. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on CLP Holdings becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that CLP Holdings is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 13% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 1 warning sign facing CLP Holdings that you might find interesting.

While CLP Holdings 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.