The Returns On Capital At Hao Tian International Construction Investment Group (HKG:1341) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Hao Tian International Construction Investment Group (HKG:1341) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hao Tian International Construction Investment Group:

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

0.0097 = HK$24m ÷ (HK$2.9b - HK$425m) (Based on the trailing twelve months to March 2021).

Therefore, Hao Tian International Construction Investment Group has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 3.6%.

Check out our latest analysis for Hao Tian International Construction Investment Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hao Tian International Construction Investment Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hao Tian International Construction Investment Group, check out these free graphs here.

What Can We Tell From Hao Tian International Construction Investment Group's ROCE Trend?

In terms of Hao Tian International Construction Investment Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 1.2%, but since then they've fallen to 1.0%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Hao Tian International Construction Investment Group has decreased its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Hao Tian International Construction Investment Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hao Tian International Construction Investment Group is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 4 warning signs with Hao Tian International Construction Investment Group (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

While Hao Tian International Construction Investment Group 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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