Churchill China (LON:CHH) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Churchill China (LON:CHH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. Analysts use this formula to calculate it for Churchill China:

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

0.16 = UK£11m ÷ (UK£81m - UK£14m) (Based on the trailing twelve months to December 2023).

Therefore, Churchill China has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 9.2% it's much better.

Check out our latest analysis for Churchill China

Above you can see how the current ROCE for Churchill China compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Churchill China .

How Are Returns Trending?

When we looked at the ROCE trend at Churchill China, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 20% five years ago. 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'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.

What We Can Learn From Churchill China's ROCE

In summary, Churchill China is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last five years. Therefore based on the analysis done in this article, we don't think Churchill China has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Churchill China that you might find interesting.

While Churchill China isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.