Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating China Longyuan Power Group (HKG:916), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 China Longyuan Power Group, this is the formula:

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

0.084 = CN¥14b ÷ (CN¥237b - CN¥72b) (Based on the trailing twelve months to March 2024).

So, China Longyuan Power Group has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 7.0% generated by the Renewable Energy industry, it's much better.

Above you can see how the current ROCE for China Longyuan Power Group 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 Longyuan Power Group for free.

What The Trend Of ROCE Can Tell Us

In terms of China Longyuan Power Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.4% for the last five years, and the capital employed within the business has risen 50% 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.

What We Can Learn From China Longyuan Power Group's ROCE

As we've seen above, China Longyuan Power Group's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 66% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about China Longyuan Power Group, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While China Longyuan Power Group 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.

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