Returns On Capital At CK Infrastructure Holdings (HKG:1038) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at CK Infrastructure Holdings (HKG:1038) and its ROCE trend, we weren't exactly thrilled.

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 CK Infrastructure Holdings, this is the formula:

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

0.021 = HK$3.3b ÷ (HK$166b - HK$9.0b) (Based on the trailing twelve months to June 2023).

Thus, CK Infrastructure Holdings has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 5.3%.

View our latest analysis for CK Infrastructure Holdings

In the above chart we have measured CK Infrastructure Holdings' 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 CK Infrastructure Holdings here for free.

What Can We Tell From CK Infrastructure Holdings' ROCE Trend?

Things have been pretty stable at CK Infrastructure Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if CK Infrastructure Holdings doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that CK Infrastructure Holdings has been paying out 72% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

The Bottom Line

In summary, CK Infrastructure Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 17% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing CK Infrastructure Holdings that you might find interesting.

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.