Returns On Capital Signal Difficult Times Ahead For Datang International Power Generation (HKG:991)

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Datang International Power Generation (HKG:991), the trends above didn't look too great.

What Is 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 Datang International Power Generation:

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

0.029 = CN¥6.5b ÷ (CN¥301b - CN¥78b) (Based on the trailing twelve months to September 2023).

So, Datang International Power Generation has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.3%.

See our latest analysis for Datang International Power Generation

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're interested in investigating Datang International Power Generation's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Datang International Power Generation's ROCE Trending?

We are a bit worried about the trend of returns on capital at Datang International Power Generation. Unfortunately the returns on capital have diminished from the 4.9% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Datang International Power Generation to turn into a multi-bagger.

What We Can Learn From Datang International Power Generation's ROCE

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. It should come as no surprise then that the stock has fallen 32% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 2 warning signs for Datang International Power Generation that we think you should be aware of.

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.