Will Prinx Chengshan (Cayman) Holding (HKG:1809) Multiply In Value Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Prinx Chengshan (Cayman) Holding (HKG:1809) 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. The formula for this calculation on Prinx Chengshan (Cayman) Holding is:

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

0.13 = CN¥526m ÷ (CN¥6.4b - CN¥2.4b) (Based on the trailing twelve months to June 2020).

So, Prinx Chengshan (Cayman) Holding has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 9.8% it's much better.

View our latest analysis for Prinx Chengshan (Cayman) Holding

In the above chart we have measured Prinx Chengshan (Cayman) Holding's 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 report on analyst forecasts for the company.

What Can We Tell From Prinx Chengshan (Cayman) Holding's ROCE Trend?

On the surface, the trend of ROCE at Prinx Chengshan (Cayman) Holding doesn't inspire confidence. Around four years ago the returns on capital were 27%, but since then they've fallen to 13%. 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, Prinx Chengshan (Cayman) Holding has done well to pay down its current liabilities to 38% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Prinx Chengshan (Cayman) Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last year has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know more about Prinx Chengshan (Cayman) Holding, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Prinx Chengshan (Cayman) Holding 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. 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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