Return Trends At Changsha Broad Homes Industrial Group (HKG:2163) Aren't Appealing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Changsha Broad Homes Industrial Group (HKG:2163) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. 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)

0.068 = CN¥375m ÷ (CN¥9.5b - CN¥4.0b) (Based on the trailing twelve months to June 2021).

Therefore, Changsha Broad Homes Industrial Group has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.8%.

Check out our latest analysis for Changsha Broad Homes Industrial Group

In the above chart we have measured Changsha Broad Homes Industrial Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Changsha Broad Homes Industrial Group here for free.

What Does the ROCE Trend For Changsha Broad Homes Industrial Group Tell Us?

In terms of Changsha Broad Homes Industrial Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.8% for the last five years, and the capital employed within the business has risen 146% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Changsha Broad Homes Industrial Group has done well to reduce current liabilities to 42% of total assets over the last five 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.

Our Take On Changsha Broad Homes Industrial Group's ROCE

As we've seen above, Changsha Broad Homes Industrial Group's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 49% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Changsha Broad Homes Industrial Group (of which 1 doesn't sit too well with us!) that you should know about.

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. 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.