China High Speed Transmission Equipment Group's (HKG:658) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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 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. 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¥1.5b ÷ (CN¥26b - CN¥13b) (Based on the trailing twelve months to December 2020).

So, China High Speed Transmission Equipment Group has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Electrical industry.

Check out 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 want to delve into the historical earnings, revenue and cash flow of China High Speed Transmission Equipment Group, check out these free graphs here.

What The Trend Of ROCE Can 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. So don't be surprised if China High Speed Transmission Equipment Group doesn't end up being a multi-bagger in a few years time.

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 49%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

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 with the stock having returned a mere 7.3% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about China High Speed Transmission Equipment Group, we've spotted 2 warning signs, and 1 of them is significant.

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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