Returns At China Chengtong Development Group (HKG:217) Are On The Way Up

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, China Chengtong Development Group (HKG:217) looks quite promising in regards to its trends of return on capital.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.02 = HK$96m ÷ (HK$8.4b - HK$3.5b) (Based on the trailing twelve months to December 2024).

Therefore, China Chengtong Development Group has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.0%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Chengtong Development Group.

What Can We Tell From China Chengtong Development Group's ROCE Trend?

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 2.0%. The amount of capital employed has increased too, by 64%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 42% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

To sum it up, China Chengtong Development Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 31% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing: We've identified 3 warning signs with China Chengtong Development Group (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While China Chengtong Development Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.