Some Investors May Be Worried About Shandong Hi-Speed New Energy Group's (HKG:1250) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shandong Hi-Speed New Energy Group (HKG:1250) and its ROCE trend, we weren't exactly thrilled.

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

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. 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)

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

Therefore, Shandong Hi-Speed New Energy Group has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.6%.

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.

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

On the surface, the trend of ROCE at Shandong Hi-Speed New Energy Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.9% from 8.3% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

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. Moreover, since the stock has crumbled 77% over the last five years, it appears investors are expecting the worst. 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.

One more thing to note, we've identified 3 warning signs with Shandong Hi-Speed New Energy Group and understanding these should be part of your investment process.

While Shandong Hi-Speed New Energy Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.