The Returns On Capital At Henan Communications Planning & Design Institute (SZSE:300732) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 briefly looking over the numbers, we don't think Henan Communications Planning & Design Institute (SZSE:300732) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Henan Communications Planning & Design Institute, this is the formula:

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

0.021 = CN¥90m ÷ (CN¥6.9b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

So, Henan Communications Planning & Design Institute has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.5%.

Check out our latest analysis for Henan Communications Planning & Design Institute

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're interested in investigating Henan Communications Planning & Design Institute's past further, check out this free graph covering Henan Communications Planning & Design Institute's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Henan Communications Planning & Design Institute, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Henan Communications Planning & Design Institute's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Henan Communications Planning & Design Institute have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 24% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Henan Communications Planning & Design Institute (of which 3 don't sit too well with us!) that you should know about.

While Henan Communications Planning & Design Institute 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.