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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think China High Speed Transmission Equipment Group (HKG:658) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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)

0.04 = CN¥806m ÷ (CN¥44b - CN¥24b) (Based on the trailing twelve months to June 2024).

So, China High Speed Transmission Equipment Group has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.

See 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 covering China High Speed Transmission Equipment Group's past earnings, revenue and cash flow.

What Can We Tell From China High Speed Transmission Equipment Group's ROCE Trend?

There are better returns on capital out there than what we're seeing at China High Speed Transmission Equipment Group. The company has consistently earned 4.0% for the last five years, and the capital employed within the business has risen 56% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another thing to note, China High Speed Transmission Equipment Group has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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

In summary, China High Speed Transmission Equipment Group has simply been reinvesting capital and generating the same low rate of return as before. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 76% over the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for China High Speed Transmission Equipment Group that we think you should be aware of.

While China High Speed Transmission Equipment Group 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.