We Like These Underlying Return On Capital Trends At China Renewable Energy Investment (HKG:987)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Speaking of which, we noticed some great changes in China Renewable Energy Investment's (HKG:987) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Renewable Energy Investment, this is the formula:

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

0.026 = HK$66m ÷ (HK$2.9b - HK$404m) (Based on the trailing twelve months to December 2020).

Therefore, China Renewable Energy Investment has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.4%.

View our latest analysis for China Renewable Energy Investment

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of China Renewable Energy Investment, check out these free graphs here.

How Are Returns Trending?

While there are companies with higher returns on capital out there, we still find the trend at China Renewable Energy Investment promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 171% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On China Renewable Energy Investment's ROCE

To bring it all together, China Renewable Energy Investment has done well to increase the returns it's generating from its capital employed. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

China Renewable Energy Investment does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While China Renewable Energy Investment 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. 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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