Investors Met With Slowing Returns on Capital At China Longyuan Power Group (HKG:916)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think China Longyuan Power Group (HKG:916) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China Longyuan Power Group is:

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

0.084 = CN¥14b ÷ (CN¥237b - CN¥72b) (Based on the trailing twelve months to March 2024).

Therefore, China Longyuan Power Group has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 7.0% generated by the Renewable Energy industry, it's much better.

Check out our latest analysis for China Longyuan Power Group

Above you can see how the current ROCE for China Longyuan Power Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China Longyuan Power Group .

How Are Returns Trending?

In terms of China Longyuan Power Group's historical ROCE trend, it doesn't exactly demand attention. The company has employed 50% more capital in the last five years, and the returns on that capital have remained stable at 8.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On China Longyuan Power Group's ROCE

Long story short, while China Longyuan Power Group has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 62% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

China Longyuan Power Group does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While China Longyuan Power Group 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.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com