Beijing Jingneng Clean Energy (HKG:579) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Beijing Jingneng Clean Energy (HKG:579) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Beijing Jingneng Clean Energy is:

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

0.079 = CN¥5.4b ÷ (CN¥93b - CN¥24b) (Based on the trailing twelve months to June 2023).

So, Beijing Jingneng Clean Energy has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 6.3% generated by the Renewable Energy industry, it's much better.

Check out our latest analysis for Beijing Jingneng Clean Energy

Above you can see how the current ROCE for Beijing Jingneng Clean Energy 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 Beijing Jingneng Clean Energy here for free.

So How Is Beijing Jingneng Clean Energy's ROCE Trending?

On the surface, the trend of ROCE at Beijing Jingneng Clean Energy doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 7.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Key Takeaway

In summary, Beijing Jingneng Clean Energy is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 40% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 2 warning signs for Beijing Jingneng Clean Energy (1 can't be ignored) you should be aware of.

While Beijing Jingneng Clean Energy 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.

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.