If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think China Communications Construction (HKG:1800) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Communications Construction:

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

0.032 = CN¥31b ÷ (CN¥1.8t - CN¥826b) (Based on the trailing twelve months to September 2023).

So, China Communications Construction has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.5%.

Check out our latest analysis for China Communications Construction

In the above chart we have measured China Communications Construction'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 report for China Communications Construction.

What Does the ROCE Trend For China Communications Construction Tell Us?

We weren't thrilled with the trend because China Communications Construction's ROCE has reduced by 46% over the last five years, while the business employed 109% more capital. That being said, China Communications Construction raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. China Communications Construction probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a separate but related note, it's important to know that China Communications Construction has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To conclude, we've found that China Communications Construction is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 41% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about China Communications Construction, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.