Slowing Rates Of Return At CLP Holdings (HKG:2) Leave Little Room For Excitement

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at CLP Holdings (HKG:2) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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 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).

Therefore, CLP Holdings has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 4.6% generated by the Electric Utilities industry, it's much better.

Check out our latest analysis for CLP Holdings

Above you can see how the current ROCE for CLP Holdings 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 CLP Holdings for free.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at CLP Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at CLP Holdings in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That probably explains why CLP Holdings has been paying out 63% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

What We Can Learn From CLP Holdings' ROCE

In a nutshell, CLP Holdings has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 16% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

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 isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.