If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Chanhigh Holdings (HKG:2017), it didn't seem to tick all of these boxes.
Understanding 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 Chanhigh Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = CN¥78m ÷ (CN¥2.1b - CN¥1.1b) (Based on the trailing twelve months to June 2020).
Therefore, Chanhigh Holdings has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.
See our latest analysis for Chanhigh 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 Chanhigh Holdings, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Chanhigh Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 34% 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. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Chanhigh Holdings has decreased its current liabilities to 51% 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. 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 51% is still pretty high, so those risks are still somewhat prevalent.
What We Can Learn From 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. These growth trends haven't led to growth returns though, since the stock has fallen 68% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One more thing: We've identified 4 warning signs with Chanhigh Holdings (at least 2 which are concerning) , and understanding these would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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About SEHK:2017
Chanhigh Holdings
An investment holding company, provides landscape and municipal works construction and maintenance services in the People’s Republic of China and Hong Kong.
Flawless balance sheet and good value.
