Should We Be Excited About The Trends Of Returns At China Unicom (Hong Kong) (HKG:762)?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at China Unicom (Hong Kong) (HKG:762) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.039 = CN¥14b ÷ (CN¥569b - CN¥212b) (Based on the trailing twelve months to September 2020).

Therefore, China Unicom (Hong Kong) has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Telecom industry average of 5.7%.

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, you can check out the forecasts from the analysts covering China Unicom (Hong Kong) here for free.

What Does the ROCE Trend For China Unicom (Hong Kong) Tell Us?

When we looked at the ROCE trend at China Unicom (Hong Kong), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.9% from 7.4% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, China Unicom (Hong Kong) has done well to pay down its current liabilities to 37% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, China Unicom (Hong Kong) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 46% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think China Unicom (Hong Kong) has the makings of a multi-bagger.

If you want to continue researching China Unicom (Hong Kong), you might be interested to know about the 2 warning signs that our analysis has discovered.

While China Unicom (Hong Kong) 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. 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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