The Returns At State Grid Information & Communication (SHSE:600131) Aren't Growing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over State Grid Information & Communication's (SHSE:600131) trend of ROCE, we liked what we saw.

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. The formula for this calculation on State Grid Information & Communication is:

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

0.12 = CN¥742m ÷ (CN¥13b - CN¥6.6b) (Based on the trailing twelve months to June 2024).

So, State Grid Information & Communication has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 3.9% generated by the IT industry.

Check out our latest analysis for State Grid Information & Communication

Above you can see how the current ROCE for State Grid Information & Communication compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering State Grid Information & Communication for free.

So How Is State Grid Information & Communication's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 74% more capital in the last five years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, State Grid Information & Communication has a high ratio of current liabilities to total assets of 51%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On State Grid Information & Communication's ROCE

To sum it up, State Grid Information & Communication has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 24% return if they held over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching State Grid Information & Communication, you might be interested to know about the 1 warning sign that our analysis has discovered.

While State Grid Information & Communication 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.