Return Trends At China Longyuan Power Group (HKG:916) Aren't Appealing

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating China Longyuan Power Group (HKG:916), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for China Longyuan Power Group, this is the formula:

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

0.076 = CN¥12b ÷ (CN¥243b - CN¥80b) (Based on the trailing twelve months to June 2024).

Therefore, China Longyuan Power Group has an ROCE of 7.6%. 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 China Longyuan Power Group

In the above chart we have measured China Longyuan Power Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Longyuan Power Group .

How Are Returns Trending?

The returns on capital haven't changed much for China Longyuan Power Group in recent years. The company has employed 44% more capital in the last five years, and the returns on that capital have remained stable at 7.6%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

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 94% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing China Longyuan Power Group we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.