Returns On Capital At China Pipe Group (HKG:380) Paint A Concerning Picture

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at China Pipe Group (HKG:380) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for China Pipe Group:

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

0.10 = HK$71m ÷ (HK$908m - HK$192m) (Based on the trailing twelve months to December 2021).

So, China Pipe Group has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 4.3% generated by the Trade Distributors industry, it's much better.

View our latest analysis for China Pipe Group

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 China Pipe Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China Pipe Group Tell Us?

On the surface, the trend of ROCE at China Pipe Group doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 10.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that China Pipe Group is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 54% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

China Pipe Group does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While China Pipe Group 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.