Returns On Capital Are Showing Encouraging Signs At BHCC Holding (HKG:1552)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Speaking of which, we noticed some great changes in BHCC Holding's (HKG:1552) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for BHCC Holding, this is the formula:

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

0.16 = S$6.8m ÷ (S$124m - S$81m) (Based on the trailing twelve months to June 2023).

Therefore, BHCC Holding has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.3% it's much better.

See our latest analysis for BHCC Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for BHCC Holding's ROCE against it's prior returns. If you'd like to look at how BHCC Holding has performed in the past in other metrics, you can view this free graph of BHCC Holding's past earnings, revenue and cash flow.

So How Is BHCC Holding's ROCE Trending?

BHCC Holding is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 29% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 65% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

To bring it all together, BHCC Holding has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 58% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 3 warning signs we've spotted with BHCC Holding (including 1 which makes us a bit uncomfortable) .

While BHCC Holding 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.