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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Understanding 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. Analysts use this formula to calculate it for HK Electric Investments and HK Electric Investments:

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

0.046 = HK$5.2b ÷ (HK$119b - HK$5.1b) (Based on the trailing twelve months to December 2023).

So, HK Electric Investments and HK Electric Investments has an ROCE of 4.6%. On its own that's a low return, but compared to the average of 3.4% generated by the Electric Utilities industry, it's much better.

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

In the above chart we have measured HK Electric Investments and HK Electric Investments' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for HK Electric Investments and HK Electric Investments .

So How Is HK Electric Investments and HK Electric Investments' ROCE Trending?

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 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. On top of that you'll notice that HK Electric Investments and HK Electric Investments has been paying out a large portion (86%) of earnings in the form of dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

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 in the last five years, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 2 warning signs with HK Electric Investments and HK Electric Investments (at least 1 which is significant) , and understanding them would certainly be useful.

While HK Electric Investments and HK Electric Investments may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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