Return Trends At China High Speed Transmission Equipment Group (HKG:658) Aren't Appealing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at China High Speed Transmission Equipment Group (HKG:658) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for China High Speed Transmission Equipment Group, this is the formula:

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

0.083 = CN¥1.5b ÷ (CN¥42b - CN¥23b) (Based on the trailing twelve months to December 2022).

Therefore, China High Speed Transmission Equipment Group has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.0%.

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.

SWOT Analysis for China High Speed Transmission Equipment Group

What The Trend Of ROCE Can Tell Us

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 8.3% for the last five years, and the capital employed within the business has risen 31% 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.

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 56%, 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.

In Conclusion...

In conclusion, China High Speed Transmission Equipment Group has been investing more capital into the business, but returns on that capital haven't increased. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 76% 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.

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.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.