The Returns On Capital At Huaneng Power International (HKG:902) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. 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.

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. Analysts use this formula to calculate it for Huaneng Power International:

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

0.061 = CN¥18b ÷ (CN¥448b - CN¥144b) (Based on the trailing twelve months to June 2021).

So, Huaneng Power International has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 6.9%.

See our latest analysis for Huaneng Power International

Above you can see how the current ROCE for Huaneng Power International compares to its prior returns on capital, but there's only so much you can tell from the past. 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

On the surface, the trend of ROCE at Huaneng Power International doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 6.1%. 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

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 with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 5 warning signs for Huaneng Power International (1 shouldn't be ignored) you should be aware of.

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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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.
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