If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Chongqing Three Gorges Water Conservancy and Electric Power (SHSE:600116) and its ROCE trend, we weren't exactly thrilled.

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 Chongqing Three Gorges Water Conservancy and Electric Power:

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

0.025 = CN¥403m ÷ (CN¥23b - CN¥6.8b) (Based on the trailing twelve months to September 2023).

So, Chongqing Three Gorges Water Conservancy and Electric Power has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 6.3%.

View our latest analysis for Chongqing Three Gorges Water Conservancy and Electric Power

Above you can see how the current ROCE for Chongqing Three Gorges Water Conservancy and Electric Power compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Chongqing Three Gorges Water Conservancy and Electric Power.

The Trend Of ROCE

On the surface, the trend of ROCE at Chongqing Three Gorges Water Conservancy and Electric Power doesn't inspire confidence. To be more specific, ROCE has fallen from 5.6% over the last five years. However it looks like Chongqing Three Gorges Water Conservancy and Electric Power might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Chongqing Three Gorges Water Conservancy and Electric Power's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Chongqing Three Gorges Water Conservancy and Electric Power (of which 1 makes us a bit uncomfortable!) that you should know about.

While Chongqing Three Gorges Water Conservancy and Electric Power isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.