China Mobile (HKG:941) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at China Mobile (HKG:941) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China Mobile is:

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

0.095 = CN¥115b ÷ (CN¥1.7t - CN¥517b) (Based on the trailing twelve months to March 2021).

Therefore, China Mobile has an ROCE of 9.5%. On its own, that's a low figure but it's around the 8.3% average generated by the Wireless Telecom industry.

View our latest analysis for China Mobile

Above you can see how the current ROCE for China Mobile 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 Mobile here for free.

How Are Returns Trending?

When we looked at the ROCE trend at China Mobile, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.5% from 12% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that China Mobile is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for China Mobile that we think you should be aware of.

While China Mobile 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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