Returns On Capital At China High Speed Transmission Equipment Group (HKG:658) Have Stalled

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Understanding 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. 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)

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

Therefore, China High Speed Transmission Equipment Group has an ROCE of 8.4%. Even though it's in line with the industry average of 7.8%, it's still a low return by itself.

See 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 Does the ROCE Trend For China High Speed Transmission Equipment Group Tell Us?

In terms of China High Speed Transmission Equipment Group's historical ROCE trend, it doesn't exactly demand attention. The company has employed 24% more capital in the last five years, and the returns on that capital have remained stable at 8.4%. 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.

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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In conclusion, China High Speed Transmission Equipment Group has been investing more capital into the business, but returns on that capital haven't increased. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 73% over 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.

If you want to know some of the risks facing China High Speed Transmission Equipment Group we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.