Returns On Capital At China State Construction International Holdings (HKG:3311) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at China State Construction International Holdings (HKG:3311) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on China State Construction International Holdings is:

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

0.096 = HK$12b ÷ (HK$229b - HK$103b) (Based on the trailing twelve months to December 2022).

So, China State Construction International Holdings has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 7.0%.

See our latest analysis for China State Construction International Holdings

In the above chart we have measured China State Construction International Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China State Construction International Holdings here for free.

What Does the ROCE Trend For China State Construction International Holdings Tell Us?

The returns on capital haven't changed much for China State Construction International Holdings in recent years. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 89% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a separate but related note, it's important to know that China State Construction International Holdings has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, China State Construction International Holdings has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 26% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about China State Construction International Holdings, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While China State Construction International Holdings 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.