Stock Analysis

Zhaobangji Properties Holdings (HKG:1660) Hasn't Managed To Accelerate Its Returns

SEHK:1660
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There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Zhaobangji Properties Holdings' (HKG:1660) trend of ROCE, we liked what we saw.

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 Zhaobangji Properties Holdings, this is the formula:

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

0.14 = HK$71m ÷ (HK$604m - HK$88m) (Based on the trailing twelve months to September 2021).

So, Zhaobangji Properties Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 4.3% generated by the Trade Distributors industry.

View our latest analysis for Zhaobangji Properties Holdings

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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhaobangji Properties Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zhaobangji Properties Holdings, check out these free graphs here.

What Does the ROCE Trend For Zhaobangji Properties Holdings Tell Us?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 139% more capital into its operations. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Zhaobangji Properties Holdings has done well to reduce current liabilities to 15% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Zhaobangji Properties Holdings' ROCE

To sum it up, Zhaobangji Properties Holdings has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 802% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhaobangji Properties Holdings (of which 1 is concerning!) that you should know about.

While Zhaobangji Properties Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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

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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.