Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Leshan Electric PowerLtd (SHSE:600644) and its ROCE trend, we weren't exactly thrilled.
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 Leshan Electric PowerLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0076 = CN¥23m ÷ (CN¥4.2b - CN¥1.1b) (Based on the trailing twelve months to June 2024).
Thus, Leshan Electric PowerLtd has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.8%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Leshan Electric PowerLtd has performed in the past in other metrics, you can view this free graph of Leshan Electric PowerLtd's past earnings, revenue and cash flow.
The Trend Of ROCE
Unfortunately, the trend isn't great with ROCE falling from 3.2% five years ago, while capital employed has grown 28%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Leshan Electric PowerLtd's earnings and if they change as a result from the capital raise.
What We Can Learn From Leshan Electric PowerLtd's ROCE
In summary, Leshan Electric PowerLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 8.1% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we found 2 warning signs for Leshan Electric PowerLtd (1 is potentially serious) you should be aware of.
While Leshan Electric PowerLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
