What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at China High Speed Transmission Equipment Group (HKG:658) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China High Speed Transmission Equipment Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = CN¥806m ÷ (CN¥44b - CN¥24b) (Based on the trailing twelve months to June 2024).
Thus, China High Speed Transmission Equipment Group has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.
Check out our latest analysis for China High Speed Transmission Equipment Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for China High Speed Transmission Equipment Group's ROCE against it's prior returns. If you're interested in investigating China High Speed Transmission Equipment Group's past further, check out this free graph covering China High Speed Transmission Equipment Group's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at China High Speed Transmission Equipment Group. The company has employed 56% more capital in the last five years, and the returns on that capital have remained stable at 4.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a separate but related note, it's important to know that China High Speed Transmission Equipment Group has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On China High Speed Transmission Equipment Group's ROCE
Long story short, while China High Speed Transmission Equipment Group has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 79% over the last five years. Therefore based on the analysis done in this article, we don't think China High Speed Transmission Equipment Group has the makings of a multi-bagger.
If you want to continue researching China High Speed Transmission Equipment Group, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.