If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in China Unicom (Hong Kong)'s (HKG:762) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Unicom (Hong Kong):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = CN¥17b ÷ (CN¥659b - CN¥261b) (Based on the trailing twelve months to September 2023).
So, China Unicom (Hong Kong) has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Telecom industry average of 6.6%.
Check out our latest analysis for China Unicom (Hong Kong)
Above you can see how the current ROCE for China Unicom (Hong Kong) 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 China Unicom (Hong Kong) here for free.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.2%. The amount of capital employed has increased too, by 22%. So we're very much inspired by what we're seeing at China Unicom (Hong Kong) thanks to its ability to profitably reinvest capital.
The Bottom Line On China Unicom (Hong Kong)'s ROCE
In summary, it's great to see that China Unicom (Hong Kong) can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 25% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
China Unicom (Hong Kong) does have some risks though, and we've spotted 1 warning sign for China Unicom (Hong Kong) that you might be interested in.
While China Unicom (Hong Kong) 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.