HK Electric Investments and HK Electric Investments (HKG:2638) Has More To Do To Multiply In Value Going Forward

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at HK Electric Investments and HK Electric Investments (HKG:2638), it didn't seem to tick all of these boxes.

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. The formula for this calculation on HK Electric Investments and HK Electric Investments is:

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

0.04 = HK$4.1b ÷ (HK$112b - HK$8.3b) (Based on the trailing twelve months to December 2020).

So, HK Electric Investments and HK Electric Investments has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 5.7%.

View 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'd like to see what analysts are forecasting going forward, you should check out our free report for HK Electric Investments and HK Electric Investments.

What Does the ROCE Trend For HK Electric Investments and HK Electric Investments Tell Us?

There hasn't been much to report for HK Electric Investments and HK Electric Investments' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if HK Electric Investments and HK Electric Investments doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that HK Electric Investments and HK Electric Investments has been paying out 98% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

The Bottom Line On HK Electric Investments and HK Electric Investments' ROCE

In summary, HK Electric Investments and HK Electric Investments isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing HK Electric Investments and HK Electric Investments, we've discovered 2 warning signs that you should be aware of.

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. 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.
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