Is Changsha Broad Homes Industrial Group (HKG:2163) Likely To Turn Things Around?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Changsha Broad Homes Industrial Group's (HKG:2163) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Changsha Broad Homes Industrial Group:

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

0.11 = CN¥533m ÷ (CN¥9.2b - CN¥4.3b) (Based on the trailing twelve months to June 2020).

Therefore, Changsha Broad Homes Industrial Group has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

Check out our latest analysis for Changsha Broad Homes Industrial Group

Above you can see how the current ROCE for Changsha Broad Homes Industrial Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Changsha Broad Homes Industrial Group here for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. Over the past three years, ROCE has remained relatively flat at around 11% and the business has deployed 79% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Changsha Broad Homes Industrial Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Changsha Broad Homes Industrial Group has done well to reduce current liabilities to 47% of total assets over the last three years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Key Takeaway

To sum it up, Changsha Broad Homes Industrial Group has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 4 warning signs with Changsha Broad Homes Industrial Group and understanding these should be part of your investment process.

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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