Returns On Capital At China Power International Development (HKG:2380) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at China Power International Development (HKG:2380) and its ROCE trend, we weren't exactly thrilled.

What is 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. The formula for this calculation on China Power International Development is:

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

0.062 = CN¥7.0b ÷ (CN¥156b - CN¥43b) (Based on the trailing twelve months to December 2020).

So, China Power International Development has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 7.2%.

Check out our latest analysis for China Power International Development

Above you can see how the current ROCE for China Power International Development compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From China Power International Development's ROCE Trend?

When we looked at the ROCE trend at China Power International Development, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.2% from 10% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, China Power International Development is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 2 warning signs for China Power International Development (1 can't be ignored) you should be aware of.

While China Power International Development 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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