Stock Analysis

Returns On Capital Signal Tricky Times Ahead For China Nuclear Energy Technology (HKG:611)

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SEHK:611
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at China Nuclear Energy Technology (HKG:611) 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 Nuclear Energy Technology:

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

0.058 = HK$239m ÷ (HK$9.4b - HK$5.2b) (Based on the trailing twelve months to June 2022).

Therefore, China Nuclear Energy Technology has an ROCE of 5.8%. On its own, that's a low figure but it's around the 6.9% average generated by the Construction industry.

View our latest analysis for China Nuclear Energy Technology

roce
SEHK:611 Return on Capital Employed September 25th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Nuclear Energy Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Nuclear Energy Technology, check out these free graphs here.

What Can We Tell From China Nuclear Energy Technology's ROCE Trend?

On the surface, the trend of ROCE at China Nuclear Energy Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, China Nuclear Energy Technology has a high ratio of current liabilities to total assets of 56%. 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.

In Conclusion...

While returns have fallen for China Nuclear Energy Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 67% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 3 warning signs we've spotted with China Nuclear Energy Technology (including 2 which are concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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Find out whether China Nuclear Energy Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About SEHK:611

China Nuclear Energy Technology

China Nuclear Energy Technology Corporation Limited, an investment holding company, provides engineering, procurement, and construction (EPC) services for photovoltaic power plants in the People’s Republic of China.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth0
Past Performance1
Financial Health2
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Imperfect balance sheet and overvalued.