If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, the ROCE of State Grid YingdaLtd (SHSE:600517) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What Is It?
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 State Grid YingdaLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥2.8b ÷ (CN¥44b - CN¥20b) (Based on the trailing twelve months to March 2024).
So, State Grid YingdaLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.0% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for State Grid YingdaLtd's ROCE against it's prior returns. If you're interested in investigating State Grid YingdaLtd's past further, check out this free graph covering State Grid YingdaLtd's past earnings, revenue and cash flow.
What Can We Tell From State Grid YingdaLtd's ROCE Trend?
While the current returns on capital are decent, they haven't changed much. The company has employed 544% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that State Grid YingdaLtd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 45% of total assets, is good to see from a business owner's perspective. 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. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.
The Bottom Line
To sum it up, State Grid YingdaLtd has simply been reinvesting capital steadily, at those decent rates of return. However, despite the favorable fundamentals, the stock has fallen 38% over the last five years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
One more thing to note, we've identified 1 warning sign with State Grid YingdaLtd and understanding this should be part of your investment process.
While State Grid YingdaLtd 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.
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