The Returns On Capital At Chanhigh Holdings (HKG:2017) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Chanhigh Holdings (HKG:2017) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Chanhigh Holdings, this is the formula:

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

0.045 = CN¥45m ÷ (CN¥2.2b - CN¥1.2b) (Based on the trailing twelve months to December 2020).

Thus, Chanhigh Holdings has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.7%.

View our latest analysis for Chanhigh Holdings

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

The Trend Of ROCE

On the surface, the trend of ROCE at Chanhigh Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 37% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Chanhigh Holdings has done well to pay down its current liabilities to 55% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 55% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Chanhigh Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Chanhigh Holdings is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 46% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Chanhigh Holdings does have some risks, we noticed 6 warning signs (and 2 which are significant) we think you should know about.

While Chanhigh 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.

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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.
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