Returns On Capital At Datang International Power Generation (HKG:991) Have Stalled

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Datang International Power Generation (HKG:991), it didn't seem to tick all of these boxes.

What is 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. Analysts use this formula to calculate it for Datang International Power Generation:

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

0.06 = CN¥12b ÷ (CN¥281b - CN¥76b) (Based on the trailing twelve months to June 2021).

Thus, Datang International Power Generation has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 7.0%.

See 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?

Over the past five years, Datang International Power Generation's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Datang International Power Generation to be a multi-bagger going forward. On top of that you'll notice that Datang International Power Generation has been paying out a large portion (82%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

The Key Takeaway

In a nutshell, Datang International Power Generation has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Datang International Power Generation (of which 1 is a bit concerning!) that you should know about.

While Datang International Power Generation 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.
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