Here's What To Make Of HK Electric Investments and HK Electric Investments' (HKG:2638) Decelerating Rates Of Return

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think HK Electric Investments and HK Electric Investments (HKG:2638) 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. To calculate this metric for HK Electric Investments and HK Electric Investments, this is the formula:

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

0.042 = HK$4.7b ÷ (HK$119b - HK$6.8b) (Based on the trailing twelve months to June 2022).

Thus, HK Electric Investments and HK Electric Investments has an ROCE of 4.2%. Even though it's in line with the industry average of 3.8%, it's still a low return by itself.

See our latest analysis for HK Electric Investments and HK Electric Investments

Above you can see how the current ROCE for HK Electric Investments and HK Electric Investments compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Over the past five years, HK Electric Investments and HK Electric Investments' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at HK Electric Investments and HK Electric Investments in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That being the case, it makes sense that HK Electric Investments and HK Electric Investments has been paying out 92% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

In Conclusion...

We can conclude that in regards to HK Electric Investments and HK Electric Investments' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, HK Electric Investments and HK Electric Investments does come with some risks, and we've found 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.