What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 CLP Holdings (HKG:2), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for CLP Holdings, this is the formula:

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

0.091 = HK$17b ÷ (HK$234b - HK$43b) (Based on the trailing twelve months to June 2024).

Therefore, CLP Holdings has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Electric Utilities industry average of 4.0%.

Above you can see how the current ROCE for CLP Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CLP Holdings for free.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for CLP Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if CLP Holdings doesn't end up being a multi-bagger in a few years time. On top of that you'll notice that CLP Holdings has been paying out a large portion (61%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

The Bottom Line On CLP Holdings' ROCE

We can conclude that in regards to CLP Holdings' returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 3.3% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

CLP Holdings does have some risks though, and we've spotted 3 warning signs for CLP Holdings that you might be interested in.

While CLP Holdings 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.