Zhaobangji Properties Holdings' (HKG:1660) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Zhaobangji Properties Holdings (HKG:1660), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Zhaobangji Properties Holdings is:

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

0.18 = HK$80m ÷ (HK$519m - HK$78m) (Based on the trailing twelve months to September 2020).

Thus, Zhaobangji Properties Holdings has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 3.9% generated by the Trade Distributors industry.

Check out our latest analysis for Zhaobangji Properties Holdings

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?

When we looked at the ROCE trend at Zhaobangji Properties Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 32% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Zhaobangji Properties Holdings has decreased its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, we're somewhat concerned by Zhaobangji Properties Holdings' diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 30% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Zhaobangji Properties Holdings, we've discovered 1 warning sign that you should be aware of.

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This article by Simply Wall St is general in nature. 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.
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