Capital returns herald tough times for China's nuclear power technology (HKG:611)

If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. In light of this, when we looked nuclear power technology in china (HKG:611) and its ROCE trend, we weren’t exactly thrilled.

Return on capital employed (ROCE): what is it?

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. Analysts use this formula to calculate it for China Nuclear Energy Technology:

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

0.058 = HK$239 million ÷ (HK$9.4 billion – HK$5.2 billion) (Based on the last twelve months to June 2022).

Therefore, China Nuclear Energy Technology posted a ROCE of 5.8%. By itself, this is a low number, but it is around the average of 6.9% generated by the construction industry.

Check out our latest analysis for China Nuclear Energy Technology

Historical performance is a great starting point when researching a stock. So above you can see China Nuclear Energy Technology’s ROCE gauge compared to its past returns. If you want to dive deep into China Nuclear Energy Technology’s earnings, revenue, and cash flow history, check out these free graphics here.

What can we say about the ROCE trend of China Nuclear Energy Technology?

On the surface, the ROCE trend at China Nuclear Energy Technology does not inspire confidence. To be more specific, ROCE has fallen by 11% over the past five years. Although, given that revenue and the amount of assets used in the business have increased, it 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 term.

Something else to note, China Nuclear Energy Technology has a high current liabilities to total assets ratio of 56%. This may entail certain risks, since the company is essentially dependent on its suppliers or other types of short-term creditors. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.

In conclusion…

While returns have fallen for China Nuclear Energy Technology lately, we are encouraged to see that sales are increasing and the company is reinvesting in its operations. However, despite the promising trends, the stock has fallen 67% in the past five years, so there could be an opportunity here for shrewd investors. Therefore, we recommend that you research this stock further to find out what other company fundamentals can show us.

One last note, you should inquire about the 3 warning signs we spotted with China Nuclear Energy Technology (including 2 that are of concern).

For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.