Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, from a first glance at China Southern Power Grid Energy Efficiency & Clean Energy (SZSE:003035) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. The formula for this calculation on China Southern Power Grid Energy Efficiency & Clean Energy is:

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

0.06 = CN¥816m ÷ (CN¥17b - CN¥3.4b) (Based on the trailing twelve months to June 2023).

Therefore, China Southern Power Grid Energy Efficiency & Clean Energy has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 5.5%.

Above you can see how the current ROCE for China Southern Power Grid Energy Efficiency & Clean Energy 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 China Southern Power Grid Energy Efficiency & Clean Energy for free.

What Does the ROCE Trend For China Southern Power Grid Energy Efficiency & Clean Energy Tell Us?

In terms of China Southern Power Grid Energy Efficiency & Clean Energy's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.0% for the last five years, and the capital employed within the business has risen 267% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, China Southern Power Grid Energy Efficiency & Clean Energy has done well to reduce current liabilities to 20% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On China Southern Power Grid Energy Efficiency & Clean Energy's ROCE

Long story short, while China Southern Power Grid Energy Efficiency & Clean Energy has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 54% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

China Southern Power Grid Energy Efficiency & Clean Energy does have some risks though, and we've spotted 1 warning sign for China Southern Power Grid Energy Efficiency & Clean Energy that you might be interested in.

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.