Returns On Capital Signal Tricky Times Ahead For BHCC Holding (HKG:1552)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at BHCC Holding (HKG:1552) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.0045 = S$309k ÷ (S$121m - S$52m) (Based on the trailing twelve months to December 2020).

Thus, BHCC Holding has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.6%.

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 past earnings, revenue and cash flow.

So How Is BHCC Holding's ROCE Trending?

In terms of BHCC Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 60% over the last five years. 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, BHCC Holding has done well to pay down its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

In summary, BHCC Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 66% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 4 warning signs with BHCC Holding (at least 2 which are concerning) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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