If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating China Three Gorges Renewables (Group)Ltd (SHSE:600905), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for China Three Gorges Renewables (Group)Ltd, this is the formula:

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

0.045 = CN¥13b ÷ (CN¥325b - CN¥43b) (Based on the trailing twelve months to March 2024).

Thus, China Three Gorges Renewables (Group)Ltd has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.9%.

Above you can see how the current ROCE for China Three Gorges Renewables (Group)Ltd 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 analyst report for China Three Gorges Renewables (Group)Ltd .

What Can We Tell From China Three Gorges Renewables (Group)Ltd's ROCE Trend?

There are better returns on capital out there than what we're seeing at China Three Gorges Renewables (Group)Ltd. The company has employed 277% more capital in the last five years, and the returns on that capital have remained stable at 4.5%. 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.

Our Take On China Three Gorges Renewables (Group)Ltd's ROCE

Long story short, while China Three Gorges Renewables (Group)Ltd has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 28% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think China Three Gorges Renewables (Group)Ltd has the makings of a multi-bagger.

If you'd like to know more about China Three Gorges Renewables (Group)Ltd, we've spotted 2 warning signs, and 1 of them is concerning.

While China Three Gorges Renewables (Group)Ltd 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.

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