Investors Could Be Concerned With Putian Communication Group's (HKG:1720) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Putian Communication Group (HKG:1720) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Putian Communication Group:

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

0.074 = CN¥52m ÷ (CN¥1.2b - CN¥481m) (Based on the trailing twelve months to December 2022).

So, Putian Communication Group has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 4.8%.

View our latest analysis for Putian Communication Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Putian Communication Group's ROCE against it's prior returns. If you're interested in investigating Putian Communication Group's past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Putian Communication Group

So How Is Putian Communication Group's ROCE Trending?

On the surface, the trend of ROCE at Putian Communication Group doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. However it looks like Putian Communication Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 41%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Putian Communication Group's ROCE

Bringing it all together, while we're somewhat encouraged by Putian Communication Group's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 97% over the last five years, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 4 warning signs with Putian Communication Group (at least 2 which are concerning) , and understanding them would certainly be useful.

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.

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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.