Here's What To Make Of ENN Energy Holdings' (HKG:2688) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at ENN Energy Holdings' (HKG:2688) ROCE trend, we were pretty happy with what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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¥8.8b ÷ (CN¥103b - CN¥39b) (Based on the trailing twelve months to June 2022).

So, ENN Energy Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Gas Utilities industry.

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 to see what analysts are forecasting going forward, you should check out our free report for ENN Energy Holdings.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 114% more capital into its operations. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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 On ENN Energy Holdings' ROCE

To sum it up, ENN Energy Holdings has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 126% 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'd like to know about the risks facing ENN Energy Holdings, we've discovered 1 warning sign that you should be aware of.

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.

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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.