Shandong Hi-Speed New Energy Group (HKG:1250) Will Be Hoping To Turn Its Returns On Capital Around

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shandong Hi-Speed New Energy Group is:

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

0.029 = HK$1.2b ÷ (HK$55b - HK$12b) (Based on the trailing twelve months to June 2022).

Thus, Shandong Hi-Speed New Energy Group has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.8%.

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 want to delve into the historical earnings, revenue and cash flow of Shandong Hi-Speed New Energy Group, check out these free graphs here.

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

In terms of Shandong Hi-Speed New Energy Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.9% from 8.2% 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.

On a side note, Shandong Hi-Speed New Energy Group has done well to pay down its current liabilities to 21% 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. 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.

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

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 58% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Shandong Hi-Speed New Energy Group, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.