Some Investors May Be Worried About Datang International Power Generation's (HKG:991) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Datang International Power Generation (HKG:991) we aren't filled with optimism, but let's investigate further.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Datang International Power Generation, this is the formula:

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

0.029 = CN¥5.9b ÷ (CN¥281b - CN¥78b) (Based on the trailing twelve months to September 2021).

Therefore, Datang International Power Generation has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.8%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Datang International Power Generation's ROCE Trend?

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 6.6% 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. 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 Datang International Power Generation to turn into a multi-bagger.

Our Take 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 17% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Datang International Power Generation does have some risks, we noticed 5 warning signs (and 2 which are concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.