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

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after investigating China High Speed Transmission Equipment Group (HKG:658), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.084 = CN¥1.4b ÷ (CN¥36b - CN¥20b) (Based on the trailing twelve months to June 2022).

So, China High Speed Transmission Equipment Group has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 6.2% generated by the Electrical industry, 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.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at China High Speed Transmission Equipment Group. Over the past five years, ROCE has remained relatively flat at around 8.4% and the business has deployed 24% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another thing to note, China High Speed Transmission Equipment Group has a high ratio of current liabilities to total assets of 55%. 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.

In Conclusion...

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 appear hesitant that the trends will pick up because the stock has fallen 56% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for China High Speed Transmission Equipment Group (of which 1 is potentially serious!) that you should know about.

While China High Speed Transmission Equipment Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.