Should We Be Excited About The Trends Of Returns At Putian Communication Group (HKG:1720)?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Putian Communication Group (HKG:1720) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Putian Communication Group is:

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

0.13 = CN¥73m ÷ (CN¥787m - CN¥228m) (Based on the trailing twelve months to June 2020).

Therefore, Putian Communication Group has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Communications industry.

Check out our latest analysis for Putian Communication 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're interested in investigating Putian Communication Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Putian Communication Group's ROCE Trend?

In terms of Putian Communication Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 22% five years ago. 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.

On a side note, Putian Communication Group has done well to pay down its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Putian Communication Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Putian Communication Group have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 46% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Putian Communication Group (including 1 which is is a bit concerning) .

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. 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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