I am writing today to help inform people who are new to the stock market and want to begin learning the link between Zhaobangji Properties Holdings Limited (HKG:1660)’s return fundamentals and stock market performance.
If you purchase a 1660 share you are effectively becoming a partner with many other shareholders. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to 1660’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Thus, to understand how your money can grow by investing in Zhaobangji Properties Holdings, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
Zhaobangji Properties Holdings’s Return On Capital Employed
Choosing to invest in Zhaobangji Properties Holdings comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. To determine Zhaobangji Properties Holdings’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). Take a look at the formula box beneath:
ROCE Calculation for 1660
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = HK$30m ÷ (HK$393m – HK$72m) = 9.5%
1660’s 9.5% ROCE means that for every HK$100 you invest, the company creates HK$9.5. This makes Zhaobangji Properties Holdings unattractive when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but not to the extent investors should be aiming for.
A deeper look
1660 doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that 1660’s ROCE has deteriorated from 32%, indicating the company’s capital returns have declined. Over the same period, EBT went from HK$38m to HK$30m and capital employed has increased due to a rise in total assets and a smaller reliance on current liabilities (less borrowing to fund operations) , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
ROCE for 1660 investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and management ability. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for 1660’s future growth? Take a look at our free research report of analyst consensus for 1660’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Zhaobangji Properties Holdings’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.