Be Wary Of Shandong Hi-Speed New Energy Group (HKG:1250) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Shandong Hi-Speed New Energy Group (HKG:1250), 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. Analysts use this formula to calculate it for Shandong Hi-Speed New Energy Group:

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

0.039 = HK$1.8b ÷ (HK$54b - HK$8.9b) (Based on the trailing twelve months to June 2024).

Thus, Shandong Hi-Speed New Energy Group has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.9%.

See our latest analysis for Shandong Hi-Speed New Energy Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shandong Hi-Speed New Energy Group has performed in the past in other metrics, you can view this free graph of Shandong Hi-Speed New Energy Group's past earnings, revenue and cash flow.

What Can We Tell From Shandong Hi-Speed New Energy Group's ROCE Trend?

We weren't thrilled with the trend because Shandong Hi-Speed New Energy Group's ROCE has reduced by 45% over the last five years, while the business employed 31% more capital. That being said, Shandong Hi-Speed New Energy Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shandong Hi-Speed New Energy Group might not have received a full period of earnings contribution from it.

On a related note, Shandong Hi-Speed New Energy Group has decreased its current liabilities to 16% 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

Bringing it all together, while we're somewhat encouraged by Shandong Hi-Speed New Energy Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Shandong Hi-Speed New Energy Group does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

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.