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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of ENN Energy Holdings (HKG:2688) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for ENN Energy Holdings:

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

0.15 = CN¥10b ÷ (CN¥105b - CN¥37b) (Based on the trailing twelve months to June 2023).

So, ENN Energy Holdings has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Gas Utilities industry average of 8.2% it's much better.

See 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 93% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that ENN Energy Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From ENN Energy Holdings' ROCE

To sum it up, ENN Energy Holdings has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 19%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

ENN Energy Holdings does have some risks though, and we've spotted 1 warning sign for ENN Energy Holdings that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.