Capital returns herald tough times for China Nuclear Technology (HKG:611)

If we want to find a potential multipacker, there are usually some underlying trends that can give clues.Ideally, businesses will exhibit two trends; the first is growing return Employed capital (ROCE), and secondly, increased quantity or used capital. If you see this, it usually means it’s a company with a great business model and plenty of lucrative reinvestment opportunities.Given this, when we look at China Nuclear Energy Technology (HKG:611) and its ROCE trend, we’re not very excited.

Return on Employed Capital (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 business. Analysts use this formula to calculate China’s nuclear technology:

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

0.058 = HK$239m ÷ (HK$9.4b – HK$5.2b) (Based on the past 12 months ending June 2022).

so, The ROCE of China Nuclear Energy Technology was 5.8%. On its own, that’s a low number, but it’s about the 6.9% average produced by the construction industry.

View our latest analysis for China’s nuclear technology

Historical performance is a good starting point when researching stocks, so above you can see China Nuclear Technology’s ROCE compared to its previous returns.If you want an in-depth look at CNNC’s historical earnings, revenue and cash flow, check out these free Mr Tu.

What can we see from the ROCE trend of China’s nuclear energy technology?

On the surface, the trend of China Nuclear ROCE does not inspire confidence. More specifically, ROCE declined from 11% over the past five years. Although given the increase in both revenue and the number of assets used by the business, this could be a sign that the company is investing in growth, and the additional capital is causing a short-term decline in ROCE. If the increased capital generates additional returns, the business and even shareholders will benefit in the long run.

It should also be noted that CNNC’s current liabilities account for 56% of its total assets. That could pose some risks, as the company basically relies heavily on its suppliers or other types of short-term creditors to operate. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is low.

In summary…

Despite the recent decline in China Nuclear Technology’s returns, we are pleased to see that sales are growing and the business is reinvesting in its operations. However, despite the encouraging trend, the stock is down 67% over the past five years, so savvy investors may have a chance. Therefore, we recommend further research on this stock to discover what other fundamentals of the business can show us.

One last point, you should understand 3 warning signs We found Chinese nuclear technology (including 2 noteworthy).

For those who like to invest strong company, see this free List of companies with strong 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 solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It does not constitute advice to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analytics driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Wall Street has no positions in any of the stocks mentioned.