What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at China Southern Power Grid TechnologyLtd (SHSE:688248) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for China Southern Power Grid TechnologyLtd:

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

0.092 = CN¥278m ÷ (CN¥4.4b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

So, China Southern Power Grid TechnologyLtd has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 6.5%.

In the above chart we have measured China Southern Power Grid TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Southern Power Grid TechnologyLtd for free.

What The Trend Of ROCE Can Tell Us

In terms of China Southern Power Grid TechnologyLtd's historical ROCE trend, it doesn't exactly demand attention. The company has employed 1,210% more capital in the last five years, and the returns on that capital have remained stable at 9.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, China Southern Power Grid TechnologyLtd has done well to reduce current liabilities to 32% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On China Southern Power Grid TechnologyLtd's ROCE

Long story short, while China Southern Power Grid TechnologyLtd has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 21% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you're still interested in China Southern Power Grid TechnologyLtd it's worth checking out our FREE intrinsic value approximation for 688248 to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com