Is Huaneng Power International (HKG:902) Likely To Turn Things Around?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Huaneng Power International (HKG:902) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Huaneng Power International is:

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

0.076 = CN¥22b ÷ (CN¥427b - CN¥136b) (Based on the trailing twelve months to September 2020).

Therefore, Huaneng Power International has an ROCE of 7.6%. On its own, that's a low figure but it's around the 7.5% average generated by the Renewable Energy industry.

View 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, you can check out the forecasts from the analysts covering Huaneng Power International here for free.

What Can We Tell From Huaneng Power International's ROCE Trend?

In terms of Huaneng Power International's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 7.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Huaneng Power International's ROCE

In summary, Huaneng Power International is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Huaneng Power International (of which 1 is a bit unpleasant!) that you should know about.

While Huaneng Power International 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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