What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at China Satellite Communications (SHSE:601698) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on China Satellite Communications is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.029 = CN¥603m ÷ (CN¥23b - CN¥1.8b) (Based on the trailing twelve months to March 2024).

Thus, China Satellite Communications has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Media industry average of 4.0%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Satellite Communications' ROCE against it's prior returns. If you'd like to look at how China Satellite Communications has performed in the past in other metrics, you can view this free graph of China Satellite Communications' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of China Satellite Communications' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.9%, but since then they've fallen to 2.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On China Satellite Communications' ROCE

In summary, China Satellite Communications is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 79% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for China Satellite Communications you'll probably want to know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com