China Chengtong Development Group (HKG:217) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at China Chengtong Development Group (HKG:217) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on China Chengtong Development Group is:

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

0.026 = HK$121m ÷ (HK$8.1b - HK$3.4b) (Based on the trailing twelve months to June 2022).

Thus, China Chengtong Development Group has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 4.1%.

View our latest analysis for China Chengtong Development Group

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'd like to look at how China Chengtong Development Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is China Chengtong Development Group's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 2.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 61% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 42% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From China Chengtong Development Group's ROCE

All in all, it's terrific to see that China Chengtong Development Group is reaping the rewards from prior investments and is growing its capital base. Although the company may be facing some issues elsewhere since the stock has plunged 75% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

On a final note, we found 5 warning signs for China Chengtong Development Group (2 are a bit concerning) you should be aware of.

While China Chengtong Development Group 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.