Shandong Hi-Speed New Energy Group (HKG:1250) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Shandong Hi-Speed New Energy Group (HKG:1250) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Shandong Hi-Speed New Energy Group, this is the formula:

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

0.052 = HK$2.0b ÷ (HK$50b - HK$12b) (Based on the trailing twelve months to June 2023).

So, Shandong Hi-Speed New Energy Group has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.2%.

See 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.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shandong Hi-Speed New Energy Group doesn't inspire confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Shandong Hi-Speed New Energy Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shandong Hi-Speed New Energy Group have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 62% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Shandong Hi-Speed New Energy Group, we've discovered 2 warning signs that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.