Huaneng Power International (HKG:902) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Huaneng Power International (HKG:902), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Huaneng Power International, this is the formula:

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

0.075 = CN¥22b ÷ (CN¥444b - CN¥147b) (Based on the trailing twelve months to March 2021).

Thus, Huaneng Power International has an ROCE of 7.5%. 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 Huaneng Power International

In the above chart we have measured Huaneng Power International's 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 Huaneng Power International.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Huaneng Power International, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.5% from 17% five years ago. However it looks like Huaneng Power International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 Bottom Line On Huaneng Power International's ROCE

Bringing it all together, while we're somewhat encouraged by Huaneng Power International's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Huaneng Power International (including 1 which doesn't sit too well with us) .

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