Returns On Capital At China Longyuan Power Group (HKG:916) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at China Longyuan Power Group (HKG:916) 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 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. Analysts use this formula to calculate it for China Longyuan Power Group:

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

0.073 = CN¥12b ÷ (CN¥240b - CN¥71b) (Based on the trailing twelve months to September 2024).

So, China Longyuan Power Group has an ROCE of 7.3%. Even though it's in line with the industry average of 6.9%, it's still a low return by itself.

See 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'd like, you can check out the forecasts from the analysts covering China Longyuan Power Group for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at China Longyuan Power Group. Over the past five years, ROCE has remained relatively flat at around 7.3% and the business has deployed 50% more capital into its operations. 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...

In conclusion, China Longyuan Power Group has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 43% 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 3 warning signs (and 1 which is significant) we think you should know about.

While China Longyuan Power Group 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.