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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at China State Construction International Holdings' (HKG:3311) ROCE trend, we were pretty happy with what we saw.

What Is 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)

0.10 = HK$15b ÷ (HK$266b - HK$119b) (Based on the trailing twelve months to June 2024).

So, China State Construction International Holdings has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 5.7% it's much better.

Check out our latest analysis for China State Construction International Holdings

Above you can see how the current ROCE for China State Construction International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China State Construction International Holdings .

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 10% and the business has deployed 70% more capital into its operations. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

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 Bottom Line

In the end, China State Construction International Holdings has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 125% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 2 warning signs with China State Construction International Holdings (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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.