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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. 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.

Understanding 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. 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)

0.087 = CN¥1.8b ÷ (CN¥43b - CN¥23b) (Based on the trailing twelve months to June 2023).

So, China High Speed Transmission Equipment Group has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.3%.

See 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 covering China High Speed Transmission Equipment Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for China High Speed Transmission Equipment Group in recent years. Over the past five years, ROCE has remained relatively flat at around 8.7% and the business has deployed 46% more capital into its operations. 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 side note, China High Speed Transmission Equipment Group's current liabilities are still rather high at 53% 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

Long story short, while China High Speed Transmission Equipment Group has been reinvesting its capital, the returns that it's generating 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 78% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for China High Speed Transmission Equipment Group (of which 1 is concerning!) that you should know about.

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.