China Railway Signal & Communication (HKG:3969) Has More To Do To Multiply In Value Going Forward

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at China Railway Signal & Communication (HKG:3969), it didn't seem to tick all of these boxes.

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Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Railway Signal & Communication:

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

0.069 = CN¥4.0b ÷ (CN¥116b - CN¥58b) (Based on the trailing twelve months to June 2025).

Thus, China Railway Signal & Communication has an ROCE of 6.9%. Even though it's in line with the industry average of 6.9%, it's still a low return by itself.

See our latest analysis for China Railway Signal & Communication

Above you can see how the current ROCE for China Railway Signal & Communication compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China Railway Signal & Communication .

What Can We Tell From China Railway Signal & Communication's ROCE Trend?

There are better returns on capital out there than what we're seeing at China Railway Signal & Communication. The company has employed 26% more capital in the last five years, and the returns on that capital have remained stable at 6.9%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, China Railway Signal & Communication's current liabilities are still rather high at 50% of total assets. 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.

Our Take On China Railway Signal & Communication's ROCE

As we've seen above, China Railway Signal & Communication's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 68% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 2 warning signs for China Railway Signal & Communication (1 can't be ignored) you should be aware of.

While China Railway Signal & Communication isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.