Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at China Unicom (Hong Kong) (HKG:762) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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. 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 6.2%.
In the above chart we have measured China Unicom (Hong Kong)'s 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 China Unicom (Hong Kong) .
What Can We Tell From China Unicom (Hong Kong)'s ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 4.2%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital 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.
Our Take On China Unicom (Hong Kong)'s ROCE
To sum it up, China Unicom (Hong Kong) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 25% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a final note, we've found 1 warning sign for China Unicom (Hong Kong) that we think you should be aware of.
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.
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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.