Investors Met With Slowing Returns on Capital At CLP Holdings (HKG:2)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think CLP Holdings (HKG:2) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 CLP Holdings, this is the formula:

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

0.079 = HK$15b ÷ (HK$234b - HK$45b) (Based on the trailing twelve months to December 2024).

Thus, CLP Holdings has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 4.0% generated by the Electric Utilities industry, it's much better.

Check out 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'd like, you can check out the forecasts from the analysts covering CLP Holdings for free.

What Can We Tell From CLP Holdings' ROCE Trend?

There hasn't been much to report for CLP Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect CLP Holdings to be a multi-bagger going forward. This probably explains why CLP Holdings is paying out 59% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Bottom Line On CLP Holdings' ROCE

In summary, CLP Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 6.5% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching CLP Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.