China Nuclear Energy Technology (HKG:611) Will Want To Turn Around Its Return Trends

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at China Nuclear Energy Technology (HKG:611) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding 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 China Nuclear Energy Technology is:

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

0.052 = CN¥364m ÷ (CN¥10b - CN¥3.3b) (Based on the trailing twelve months to December 2024).

Therefore, China Nuclear Energy Technology has an ROCE of 5.2%. On its own, that's a low figure but it's around the 5.6% average generated by the Construction industry.

View our latest analysis for China Nuclear Energy Technology

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'd like to look at how China Nuclear Energy Technology has performed in the past in other metrics, you can view this free graph of China Nuclear Energy Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of China Nuclear Energy Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.5% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, China Nuclear Energy Technology has decreased its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From China Nuclear Energy Technology's ROCE

We're a bit apprehensive about China Nuclear Energy Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 87% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

China Nuclear Energy Technology does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While China Nuclear Energy Technology 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.