China Chengtong Development Group (HKG:217) Shareholders Will Want The ROCE Trajectory To Continue

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. So when we looked at China Chengtong Development Group (HKG:217) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for China Chengtong Development Group, this is the formula:

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

0.025 = HK$76m ÷ (HK$3.9b - HK$872m) (Based on the trailing twelve months to December 2020).

So, China Chengtong Development Group has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 3.7%.

Check out our latest analysis for China Chengtong Development Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Chengtong Development Group's ROCE against it's prior returns. 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?

While there are companies with higher returns on capital out there, we still find the trend at China Chengtong Development Group promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 3,947% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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. The current liabilities has increased to 22% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

As discussed above, China Chengtong Development Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Although the company may be facing some issues elsewhere since the stock has plunged 75% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

China Chengtong Development Group does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

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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