China Strategic Holdings (HKG:235) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in China Strategic Holdings' (HKG:235) returns on capital, so let's have a look.

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. To calculate this metric for China Strategic Holdings, this is the formula:

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

0.062 = HK$151m ÷ (HK$3.2b - HK$738m) (Based on the trailing twelve months to December 2021).

Therefore, China Strategic Holdings has an ROCE of 6.2%. On its own that's a low return, but compared to the average of 4.3% generated by the Trade Distributors industry, it's much better.

View our latest analysis for China Strategic Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Strategic Holdings' ROCE against it's prior returns. If you're interested in investigating China Strategic Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at China Strategic Holdings. The data shows that returns on capital have increased by 80% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, China Strategic Holdings appears to been achieving more with less, since the business is using 45% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

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 23% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On China Strategic Holdings' ROCE

In a nutshell, we're pleased to see that China Strategic Holdings has been able to generate higher returns from less capital. And since the stock has dived 77% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Like most companies, China Strategic Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

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. 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.