Qingdao CHOHO IndustrialLtd (SZSE:003033) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at Qingdao CHOHO IndustrialLtd (SZSE:003033) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Qingdao CHOHO IndustrialLtd:

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

0.066 = CN¥121m ÷ (CN¥2.2b - CN¥411m) (Based on the trailing twelve months to June 2024).

So, Qingdao CHOHO IndustrialLtd has an ROCE of 6.6%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

Check out our latest analysis for Qingdao CHOHO IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qingdao CHOHO IndustrialLtd's ROCE against it's prior returns. If you're interested in investigating Qingdao CHOHO IndustrialLtd's past further, check out this free graph covering Qingdao CHOHO IndustrialLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Qingdao CHOHO IndustrialLtd, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 6.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Qingdao CHOHO IndustrialLtd has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Qingdao CHOHO IndustrialLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Qingdao CHOHO IndustrialLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 5.7% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing, we've spotted 2 warning signs facing Qingdao CHOHO IndustrialLtd that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.