What Do The Returns At China Chengtong Development Group (HKG:217) Mean Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So on that note, China Chengtong Development Group (HKG:217) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for China Chengtong Development Group:

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

0.02 = HK$56m ÷ (HK$3.6b - HK$750m) (Based on the trailing twelve months to June 2020).

So, 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 5.4%.

View 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're interested in investigating China Chengtong Development Group's past further, check out this free graph of past earnings, revenue and cash flow.

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

It's great to see that China Chengtong Development Group has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 26%. China Chengtong Development Group could be selling under-performing assets since the ROCE is improving.

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

From what we've seen above, China Chengtong Development Group has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 78% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One final note, you should learn about the 2 warning signs we've spotted with China Chengtong Development Group (including 1 which is a bit unpleasant) .

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. 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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