Putian Communication Group (HKG:1720) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Putian Communication Group (HKG:1720), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Putian Communication Group:

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

0.032 = CN¥24m ÷ (CN¥1.2b - CN¥417m) (Based on the trailing twelve months to June 2024).

So, Putian Communication Group has an ROCE of 3.2%. On its own, that's a low figure but it's around the 3.7% average generated by the Communications industry.

See our latest analysis for Putian Communication Group

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

What Can We Tell From Putian Communication Group's ROCE Trend?

When we looked at the ROCE trend at Putian Communication Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Putian Communication Group's current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.2%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Putian Communication Group's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 90% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Putian Communication Group has the makings of a multi-bagger.

If you'd like to know more about Putian Communication Group, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

While Putian Communication Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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

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.