There Are Reasons To Feel Uneasy About B & D Strategic Holdings' (HKG:1780) Returns On Capital

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. In light of that, when we looked at B & D Strategic Holdings (HKG:1780) and its ROCE trend, we weren't exactly thrilled.

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)

0.011 = HK$2.2m ÷ (HK$268m - HK$72m) (Based on the trailing twelve months to March 2023).

Thus, B & D Strategic Holdings has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.5%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of B & D Strategic Holdings, check out these free graphs here.

What Can We Tell From B & D Strategic Holdings' ROCE Trend?

When we looked at the ROCE trend at B & D Strategic Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 1.1%. 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, B & D Strategic Holdings has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On B & D Strategic Holdings' ROCE

We're a bit apprehensive about B & D Strategic Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 505% over the last three years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

B & D Strategic Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While B & D Strategic 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.

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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.