The 22% Return On Capital At Churchill China (LON:CHH) Got Our Attention

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Churchill China's (LON:CHH) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Churchill China, this is the formula:

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

0.22 = UK£11m ÷ (UK£61m - UK£12m) (Based on the trailing twelve months to December 2019).

Thus, Churchill China has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 13%.

View our latest analysis for Churchill China

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

What Does the ROCE Trend For Churchill China Tell Us?

The trends we've noticed at Churchill China are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 42% more capital is being employed now too. So we're very much inspired by what we're seeing at Churchill China thanks to its ability to profitably reinvest capital.

The Bottom Line On Churchill China's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Churchill China has. And a remarkable 105% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Churchill China does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. 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.
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