Slowing Rates Of Return At HK Electric Investments and HK Electric Investments (HKG:2638) Leave Little Room For Excitement

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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 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)

0.047 = HK$5.4b ÷ (HK$119b - HK$4.9b) (Based on the trailing twelve months to June 2024).

Therefore, HK Electric Investments and HK Electric Investments has an ROCE of 4.7%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 4.0%.

Check out 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, you can check out the forecasts from the analysts covering HK Electric Investments and HK Electric Investments for free.

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

Over the past five years, HK Electric Investments and HK Electric Investments' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's 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 probably explains why HK Electric Investments and HK Electric Investments has been paying out 84% of its earnings as 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.

Our Take 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. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. 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.

If you'd like to know more about HK Electric Investments and HK Electric Investments, we've spotted 2 warning signs, and 1 of them is a bit concerning.

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.