Investors Could Be Concerned With Prinx Chengshan (Cayman) Holding's (HKG:1809) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Prinx Chengshan (Cayman) Holding (HKG:1809), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Prinx Chengshan (Cayman) Holding:

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

0.15 = CN¥689m ÷ (CN¥7.5b - CN¥3.0b) (Based on the trailing twelve months to December 2020).

Thus, Prinx Chengshan (Cayman) Holding has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 8.2% it's much better.

View our latest analysis for Prinx Chengshan (Cayman) Holding

Above you can see how the current ROCE for Prinx Chengshan (Cayman) Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Prinx Chengshan (Cayman) Holding's ROCE Trending?

When we looked at the ROCE trend at Prinx Chengshan (Cayman) Holding, we didn't gain much confidence. Around five years ago the returns on capital were 34%, but since then they've fallen to 15%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Prinx Chengshan (Cayman) Holding has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Prinx Chengshan (Cayman) Holding's ROCE

While returns have fallen for Prinx Chengshan (Cayman) Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 23% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Prinx Chengshan (Cayman) Holding does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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