Does China Tower (HKG:788) Have The Makings Of A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at China Tower (HKG:788) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for China Tower:

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

0.057 = CN¥13b ÷ (CN¥339b - CN¥113b) (Based on the trailing twelve months to September 2020).

So, China Tower has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.7%.

View our latest analysis for China Tower

In the above chart we have measured China Tower's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is China Tower's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last four years, returns on capital employed have risen substantially to 5.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 40%. So we're very much inspired by what we're seeing at China Tower thanks to its ability to profitably reinvest capital.

One more thing to note, China Tower has decreased current liabilities to 33% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, it's great to see that China Tower can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 38% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching China Tower, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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