There are a few key trends to look for if we are to identify the next multi-bagger. Among other things, we’ll want to see two things; first, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. However, after investigation HKBN (HKG: 1310), we don’t think the current trends fit the mold of a multi-bagger.
Return on capital employed (ROCE): what is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for HKBN:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.038 = HK $ 659 million ÷ (HK $ 22 billion – HK $ 4.4 billion) (Based on the last twelve months up to February 2021).
Therefore, HKBN has a ROCE of 3.8%. At the end of the day, that’s a low return and it is below the telecom industry average of 5.1%.
See our latest review for HKBN
Above you can see how HKBN’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What the ROCE trend can tell us
When we looked at the ROCE trend at HKBN, we didn’t gain much trust. About five years ago, returns on capital were 9.9%, but since then they have fallen to 3.8%. Although, as income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long run.
On the other hand, HKBN’s current liabilities have increased over the past five years to reach 20% of total assets, effectively distorting ROCE to some extent. If current liabilities hadn’t grown as much as they did, the ROCE might actually be even lower. Keep an eye on this ratio, as the business could run into new risks if this metric gets too high.
The basics on HKBN’s ROCE
As returns have plummeted for HKBN lately, we are encouraged to see sales increasing and the company reinvesting in its operations. These trends are starting to be recognized by investors as the stock has provided a 28% gain to shareholders who have held it over the past five years. Therefore, we recommend that you dig deeper into this title to confirm if it is a good investment.
If you want to know some of the risks that HKBN faces, we have found 4 warning signs (2 shouldn’t be ignored!) Which you should be aware of before investing here.
Although HKBN does not generate the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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