Chinney Kin Wing Holdings (HKG:1556) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Chinney Kin Wing Holdings (HKG:1556), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Chinney Kin Wing Holdings is:

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

0.12 = HK$76m ÷ (HK$1.2b - HK$607m) (Based on the trailing twelve months to June 2022).

Therefore, Chinney Kin Wing Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Construction industry.

Check out our latest analysis for Chinney Kin Wing Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chinney Kin Wing Holdings' ROCE against it's prior returns. If you're interested in investigating Chinney Kin Wing Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Chinney Kin Wing Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. However it looks like Chinney Kin Wing Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Chinney Kin Wing Holdings has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Chinney Kin Wing Holdings' ROCE

To conclude, we've found that Chinney Kin Wing Holdings is reinvesting in the business, but returns have been falling. Since the stock has declined 15% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Chinney Kin Wing Holdings (including 1 which doesn't sit too well with us) .

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. 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.