What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 Jinneng Holding Shanxi Electric PowerLTD (SZSE:000767), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jinneng Holding Shanxi Electric PowerLTD, this is the formula:

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

0.013 = CN¥503m ÷ (CN¥60b - CN¥22b) (Based on the trailing twelve months to March 2024).

So, Jinneng Holding Shanxi Electric PowerLTD has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.9%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jinneng Holding Shanxi Electric PowerLTD's ROCE against it's prior returns. If you'd like to look at how Jinneng Holding Shanxi Electric PowerLTD has performed in the past in other metrics, you can view this free graph of Jinneng Holding Shanxi Electric PowerLTD's past earnings, revenue and cash flow.

What Can We Tell From Jinneng Holding Shanxi Electric PowerLTD's ROCE Trend?

When we looked at the ROCE trend at Jinneng Holding Shanxi Electric PowerLTD, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.3% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Jinneng Holding Shanxi Electric PowerLTD has decreased its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

We're a bit apprehensive about Jinneng Holding Shanxi Electric PowerLTD because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 8.7% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a separate note, we've found 1 warning sign for Jinneng Holding Shanxi Electric PowerLTD you'll probably want to 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.