The Returns On Capital At United Energy Group (HKG:467) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating United Energy Group (HKG:467), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for United Energy Group:

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

0.059 = HK$1.2b ÷ (HK$25b - HK$5.3b) (Based on the trailing twelve months to December 2020).

Thus, United Energy Group has an ROCE of 5.9%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.

See our latest analysis for United Energy Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for United Energy Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of United Energy Group, check out these free graphs here.

So How Is United Energy Group's ROCE Trending?

When we looked at the ROCE trend at United Energy Group, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for United Energy Group have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 421% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, United Energy Group does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.