There Are Reasons To Feel Uneasy About Huitong Construction GroupLtd's (SHSE:603176) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Huitong Construction GroupLtd (SHSE:603176) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Huitong Construction GroupLtd, this is the formula:

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

0.11 = CN¥333m ÷ (CN¥5.8b - CN¥2.9b) (Based on the trailing twelve months to June 2024).

So, Huitong Construction GroupLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Construction industry.

Check out our latest analysis for Huitong Construction GroupLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Huitong Construction GroupLtd.

What Can We Tell From Huitong Construction GroupLtd's ROCE Trend?

In terms of Huitong Construction GroupLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Huitong Construction GroupLtd has done well to pay down its current liabilities to 49% of total assets. That could partly explain why the ROCE has dropped. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Huitong Construction GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 39% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Huitong Construction GroupLtd has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Huitong Construction GroupLtd (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.

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.