ENN Energy Holdings' (HKG:2688) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So, when we ran our eye over ENN Energy Holdings' (HKG:2688) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on ENN Energy Holdings is:

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

0.14 = CN¥8.2b ÷ (CN¥90b - CN¥33b) (Based on the trailing twelve months to December 2020).

So, ENN Energy Holdings has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Gas Utilities industry average of 10% it's much better.

View our latest analysis for ENN Energy Holdings

In the above chart we have measured ENN Energy 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 ENN Energy Holdings here for free.

What Does the ROCE Trend For ENN Energy Holdings Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 105% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that ENN Energy Holdings has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

The main thing to remember is that ENN Energy Holdings has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 364% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching ENN Energy Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

While ENN Energy 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. 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.
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