HKBN (HKG:1310) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think HKBN (HKG:1310) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 HKBN:

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

0.038 = HK$659m ÷ (HK$22b - HK$4.4b) (Based on the trailing twelve months to February 2021).

Thus, HKBN has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Telecom industry average of 4.8%.

View our latest analysis for HKBN

In the above chart we have measured HKBN's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for HKBN.

What Does the ROCE Trend For HKBN Tell Us?

In terms of HKBN's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.8% from 9.9% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, HKBN's current liabilities have increased over the last five years to 20% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From HKBN's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that HKBN is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 58% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 4 warning signs we've spotted with HKBN (including 2 which can't be ignored) .

While HKBN 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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