Putian Communication Group (HKG:1720) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Putian Communication Group (HKG:1720) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.069 = CN¥44m ÷ (CN¥980m - CN¥344m) (Based on the trailing twelve months to June 2021).

Therefore, Putian Communication Group has an ROCE of 6.9%. Even though it's in line with the industry average of 7.1%, it's still a low return by itself.

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'd like to look at how Putian Communication Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Putian Communication Group's ROCE Trending?

When we looked at the ROCE trend at Putian Communication Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.9% from 27% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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 Key Takeaway

We're a bit apprehensive about Putian Communication Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 86% over the last three years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Putian Communication Group, we've spotted 4 warning signs, and 2 of them are concerning.

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.

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.

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