Slowing Rates Of Return At China Unicom (Hong Kong) (HKG:762) Leave Little Room For Excitement

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 investigating China Unicom (Hong Kong) (HKG:762), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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)

0.044 = CN¥18b ÷ (CN¥668b - CN¥264b) (Based on the trailing twelve months to September 2024).

Therefore, China Unicom (Hong Kong) has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Telecom industry average of 6.4%.

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

Above you can see how the current ROCE for China Unicom (Hong Kong) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Unicom (Hong Kong) for free.

What Can We Tell From China Unicom (Hong Kong)'s ROCE Trend?

Things have been pretty stable at China Unicom (Hong Kong), with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at China Unicom (Hong Kong) in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. On top of that you'll notice that China Unicom (Hong Kong) has been paying out a large portion (69%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

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

We can conclude that in regards to China Unicom (Hong Kong)'s returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 31% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, China Unicom (Hong Kong) does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.