China High Speed Transmission Equipment Group (HKG:658) Hasn't Managed To Accelerate Its Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at China High Speed Transmission Equipment Group (HKG:658), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China High Speed Transmission Equipment Group is:

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

0.12 = CN¥1.8b ÷ (CN¥30b - CN¥15b) (Based on the trailing twelve months to December 2021).

Therefore, China High Speed Transmission Equipment Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 8.2% it's much better.

View our latest analysis for China High Speed Transmission Equipment 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'd like to look at how China High Speed Transmission Equipment Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

Things have been pretty stable at China High Speed Transmission Equipment Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. 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 50%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line 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. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last five years. Therefore based on the analysis done in this article, we don't think China High Speed Transmission Equipment Group has the makings of a multi-bagger.

If you want to know some of the risks facing China High Speed Transmission Equipment Group we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.