Return Trends At China Unicom (Hong Kong) (HKG:762) Aren't Appealing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at China Unicom (Hong Kong) (HKG:762), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for China Unicom (Hong Kong), this is the formula:

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

0.038 = CN¥15b ÷ (CN¥661b - CN¥264b) (Based on the trailing twelve months to December 2023).

Thus, China Unicom (Hong Kong) has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Telecom industry average of 6.8%.

Check out our latest analysis for China Unicom (Hong Kong)

In the above chart we have measured China Unicom (Hong Kong)'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 analyst report for China Unicom (Hong Kong) .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at China Unicom (Hong Kong). The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 3.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On China Unicom (Hong Kong)'s ROCE

In summary, China Unicom (Hong Kong) has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching China Unicom (Hong Kong), you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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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.