Capital Allocation Trends At B & D Strategic Holdings (HKG:1780) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think B & D Strategic Holdings (HKG:1780) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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 B & D Strategic Holdings, this is the formula:

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

0.055 = HK$15m ÷ (HK$327m - HK$55m) (Based on the trailing twelve months to September 2020).

Thus, B & D Strategic Holdings has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.1%.

See our latest analysis for B & D Strategic Holdings

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

What Does the ROCE Trend For B & D Strategic Holdings Tell Us?

In terms of B & D Strategic Holdings' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 40%, but since then they've fallen to 5.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, B & D Strategic Holdings has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by B & D Strategic Holdings' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 141% return in the last year, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

B & D Strategic Holdings does have some risks though, and we've spotted 2 warning signs for B & D Strategic Holdings that you might be interested in.

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. 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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