Returns On Capital Signal Tricky Times Ahead For China Railway Signal & Communication (HKG:3969)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating China Railway Signal & Communication (HKG:3969), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding 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. To calculate this metric for China Railway Signal & Communication, this is the formula:

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

0.068 = CN¥3.9b ÷ (CN¥116b - CN¥59b) (Based on the trailing twelve months to March 2025).

Thus, China Railway Signal & Communication has an ROCE of 6.8%. In absolute terms, that's a low return but it's around the Electronic industry average of 6.4%.

View 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?

When we looked at the ROCE trend at China Railway Signal & Communication, we didn't gain much confidence. Around five years ago the returns on capital were 8.7%, but since then they've fallen to 6.8%. However it looks like China Railway Signal & Communication 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that China Railway Signal & Communication has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by China Railway Signal & Communication's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know about the risks facing China Railway Signal & Communication, we've discovered 1 warning sign that you should be aware of.

While China Railway Signal & Communication may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.