If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at China High Speed Transmission Equipment Group (HKG:658) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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. 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)
0.14 = CN¥2.0b ÷ (CN¥29b - CN¥15b) (Based on the trailing twelve months to June 2021).
Therefore, 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 8.3% it's much better.
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'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.
How Are Returns Trending?
Over the past five years, China High Speed Transmission Equipment Group's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at China High Speed Transmission Equipment Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
On a side note, China High Speed Transmission Equipment Group's current liabilities are still rather high at 51% of total assets. 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 isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 41% over the last five years, investors may not be too optimistic on this trend improving either. 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 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.