If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating China Southern Power Grid Energy Efficiency & Clean Energy (SZSE:003035), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. 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)

0.042 = CN¥681m ÷ (CN¥19b - CN¥3.3b) (Based on the trailing twelve months to June 2024).

Thus, China Southern Power Grid Energy Efficiency & Clean Energy has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.6%.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for China Southern Power Grid Energy Efficiency & Clean Energy .

How Are Returns Trending?

When we looked at the ROCE trend at China Southern Power Grid Energy Efficiency & Clean Energy, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.2% from 6.2% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On China Southern Power Grid Energy Efficiency & Clean Energy's ROCE

Bringing it all together, while we're somewhat encouraged by China Southern Power Grid Energy Efficiency & Clean Energy's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 44% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for China Southern Power Grid Energy Efficiency & Clean Energy (of which 1 is a bit unpleasant!) that you should know about.

While China Southern Power Grid Energy Efficiency & Clean Energy 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.