Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at China Southern Power Grid Energy Storage (SHSE:600995) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Energy Storage:

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

0.057 = CN¥2.2b ÷ (CN¥44b - CN¥4.4b) (Based on the trailing twelve months to September 2023).

Thus, China Southern Power Grid Energy Storage has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

See our latest analysis for China Southern Power Grid Energy Storage

Above you can see how the current ROCE for China Southern Power Grid Energy Storage 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 Storage here for free.

So How Is China Southern Power Grid Energy Storage's ROCE Trending?

We weren't thrilled with the trend because China Southern Power Grid Energy Storage's ROCE has reduced by 64% over the last five years, while the business employed 1,509% more capital. That being said, China Southern Power Grid Energy Storage raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with China Southern Power Grid Energy Storage's earnings and if they change as a result from the capital raise.

The Key Takeaway

We're a bit apprehensive about China Southern Power Grid Energy Storage because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 37% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

China Southern Power Grid Energy Storage could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.