Datang International Power Generation (HKG:991) Is Finding It Tricky To Allocate Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Datang International Power Generation (HKG:991), we weren't too hopeful.

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 Datang International Power Generation is:

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

0.015 = CN¥3.3b ÷ (CN¥304b - CN¥86b) (Based on the trailing twelve months to June 2023).

Thus, Datang International Power Generation has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.2%.

View our latest analysis for Datang International Power Generation

Above you can see how the current ROCE for Datang International Power Generation 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 Datang International Power Generation here for free.

What Does the ROCE Trend For Datang International Power Generation Tell Us?

In terms of Datang International Power Generation's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 5.1% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Datang International Power Generation becoming one if things continue as they have.

The Bottom Line On Datang International Power Generation's ROCE

In summary, it's unfortunate that Datang International Power Generation is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 18% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Datang International Power Generation that we think you should be aware of.

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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.