China High Speed Transmission Equipment Group (HKG:658) Has More To Do To Multiply In Value Going Forward

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 High Speed Transmission Equipment Group (HKG:658) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for China High Speed Transmission Equipment Group:

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

0.14 = CN¥2.0b ÷ (CN¥29b - CN¥15b) (Based on the trailing twelve months to June 2021).

Thus, China High Speed Transmission Equipment Group has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 8.6% it's much better.

Check out our latest analysis for China High Speed Transmission Equipment Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China High Speed Transmission Equipment Group's ROCE against it's prior returns. If you're interested in investigating China High Speed Transmission Equipment Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China High Speed Transmission Equipment Group Tell Us?

There hasn't been much to report for China High Speed Transmission Equipment Group's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect China High Speed Transmission Equipment Group to be a multi-bagger going forward.

On a separate but related note, it's important to know that China High Speed Transmission Equipment Group has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. 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.

Our Take On China High Speed Transmission Equipment Group's ROCE

In summary, China High Speed Transmission Equipment Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with China High Speed Transmission Equipment Group (including 1 which makes us a bit uncomfortable) .

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.

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.

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