Returns On Capital Signal Tricky Times Ahead For Shandong Hi-Speed New Energy Group (HKG:1250)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 briefly looking over the numbers, we don't think Shandong Hi-Speed New Energy Group (HKG:1250) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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)

0.047 = HK$2.0b ÷ (HK$52b - HK$10b) (Based on the trailing twelve months to December 2022).

Thus, Shandong Hi-Speed New Energy Group has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.2%.

Check out our latest analysis for Shandong Hi-Speed New Energy Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Hi-Speed New Energy Group's ROCE against it's prior returns. If you're interested in investigating Shandong Hi-Speed New Energy Group's past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Shandong Hi-Speed New Energy Group

What Does the ROCE Trend For Shandong Hi-Speed New Energy Group Tell Us?

When we looked at the ROCE trend at Shandong Hi-Speed New Energy Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.8% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Shandong Hi-Speed New Energy Group has decreased its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Shandong Hi-Speed New Energy Group's ROCE

We're a bit apprehensive about Shandong Hi-Speed New Energy Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. We expect this has contributed to the stock plummeting 71% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 2 warning signs for Shandong Hi-Speed New Energy Group you'll probably want to 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.