The Returns On Capital At China Renewable Energy Investment (HKG:987) Don't Inspire Confidence

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into China Renewable Energy Investment (HKG:987), the trends above didn't look too great.

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. The formula for this calculation on China Renewable Energy Investment is:

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

0.0019 = HK$3.9m ÷ (HK$2.2b - HK$79m) (Based on the trailing twelve months to June 2024).

Therefore, China Renewable Energy Investment has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.0%.

View our latest analysis for China Renewable Energy Investment

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Renewable Energy Investment's ROCE against it's prior returns. If you'd like to look at how China Renewable Energy Investment has performed in the past in other metrics, you can view this free graph of China Renewable Energy Investment's past earnings, revenue and cash flow.

So How Is China Renewable Energy Investment's ROCE Trending?

In terms of China Renewable Energy Investment's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 1.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect China Renewable Energy Investment to turn into a multi-bagger.

On a side note, China Renewable Energy Investment has done well to pay down its current liabilities to 3.7% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with China Renewable Energy Investment (including 1 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.