Stock Analysis

Slowing Rates Of Return At Zhaobangji Properties Holdings (HKG:1660) Leave Little Room For Excitement

SEHK:1660
Source: Shutterstock

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Zhaobangji Properties Holdings (HKG:1660), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Zhaobangji Properties Holdings:

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

0.093 = HK$50m ÷ (HK$613m - HK$76m) (Based on the trailing twelve months to March 2022).

Therefore, Zhaobangji Properties Holdings has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 4.3% generated by the Trade Distributors industry, it's much better.

Check out our latest analysis for Zhaobangji Properties Holdings

roce
SEHK:1660 Return on Capital Employed September 8th 2022

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Zhaobangji Properties Holdings, check out these free graphs here.

So How Is Zhaobangji Properties Holdings' ROCE Trending?

The returns on capital haven't changed much for Zhaobangji Properties Holdings in recent years. Over the past five years, ROCE has remained relatively flat at around 9.3% and the business has deployed 89% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Zhaobangji Properties Holdings has done well to reduce current liabilities to 12% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

Long story short, while Zhaobangji Properties Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 715% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Zhaobangji Properties Holdings does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Zhaobangji Properties Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Zhaobangji Lifestyle Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.