To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at HK Electric Investments and HK Electric Investments (HKG:2638) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

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

Therefore, HK Electric Investments and HK Electric Investments has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 6.5%.

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'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 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. 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 probably explains why HK Electric Investments and HK Electric Investments has been paying out 92% 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.

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 5.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching HK Electric Investments and HK Electric Investments, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.

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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.