China Datang Corporation Renewable Power (HKG:1798) shareholders will want ROCE trajectory to continue
If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth quantity capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. So when we looked China Datang Corporation Renewable Energy (HKG:1798) and its ROCE trend, we really liked what we saw.
Understanding return on capital employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for China Datang Corporation Renewable Power, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.068 = CN¥5.1b ÷ (CN¥94b – CN¥19b) (Based on the last twelve months to September 2021).
Therefore, China Datang Corporation Renewable Power has a ROCE of 6.8%. While it’s in line with the industry average of 6.8%, it’s still a poor performer on its own.
Check out our latest analysis for China Datang Corporation Renewable Power
In the chart above, we measured China Datang Corporation Renewable Power’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So, what is the ROCE trend of China Datang Corporation Renewable Power?
Although in absolute terms this is not a high ROCE, it is promising to see it moving in the right direction. The figures show that over the past five years, returns generated on capital employed have increased significantly to 6.8%. The amount of capital employed also increased by 54%. This may indicate that there are many opportunities to invest capital internally and at ever-increasing rates, a common combination among multi-baggers.
In summary, it is great to see that China Datang Corporation Renewable Power can accumulate returns by constantly reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought after multi-baggers. And a remarkable total return of 408% over the past five years tells us that investors expect more good things to come. Therefore, we think it would be worth checking whether these trends will continue.
One last note, you should inquire about the 2 warning signs we spotted some with China Datang Corporation Renewable Power (including 1 which is a bit unpleasant).
Although China Datang Corporation Renewable Power does not currently generate the highest returns, we have compiled a list of companies that currently generate more than 25% return on equity. look at this free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.