If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. 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 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).

Therefore, 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.

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

How Are Returns Trending?

Things have been pretty stable at HK Electric Investments and HK Electric Investments, with its capital employed and returns on that capital staying somewhat the same for the last 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 (92%) 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.

What We Can Learn From HK Electric Investments and HK Electric Investments' ROCE

In a nutshell, HK Electric Investments and HK Electric Investments has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

HK Electric Investments and HK Electric Investments does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.