Returns On Capital At COFCO Capital Holdings (SZSE:002423) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 investigating COFCO Capital Holdings (SZSE:002423), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on COFCO Capital Holdings is:

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

0.022 = CN¥1.9b ÷ (CN¥128b - CN¥42b) (Based on the trailing twelve months to December 2023).

So, COFCO Capital Holdings has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 7.5%.

View our latest analysis for COFCO Capital Holdings

In the above chart we have measured COFCO Capital Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for COFCO Capital Holdings .

What Does the ROCE Trend For COFCO Capital Holdings Tell Us?

The returns on capital haven't changed much for COFCO Capital Holdings in recent years. The company has employed 77% more capital in the last four years, and the returns on that capital have remained stable at 2.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From COFCO Capital Holdings' ROCE

In summary, COFCO Capital Holdings has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 30% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think COFCO Capital Holdings has the makings of a multi-bagger.

Like most companies, COFCO Capital Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While COFCO Capital Holdings 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.

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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.