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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at China Tower (HKG:788), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for China Tower, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = CN¥15b ÷ (CN¥321b - CN¥53b) (Based on the trailing twelve months to March 2024).
So, China Tower has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.
![big](https://usnewsfile.moomoo.com/public/MM-PersistNewsContentImage/7781/20240712/0-22c9a215d7c20af3de315ef9d84dd589-0-88910327b705f43b5394fd0b883c8617.png/big)
In the above chart we have measured China Tower's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Tower for free.
So How Is China Tower's ROCE Trending?
There hasn't been much to report for China Tower's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect China Tower to be a multi-bagger going forward. That being the case, it makes sense that China Tower has been paying out 70% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 17% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
In Conclusion...
In summary, China Tower isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 42% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think China Tower has the makings of a multi-bagger.
One more thing to note, we've identified 1 warning sign with China Tower and understanding this should be part of your investment process.
While China Tower isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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