The Returns At China State Construction International Holdings (HKG:3311) Aren't Growing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think China State Construction International Holdings (HKG:3311) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for China State Construction International Holdings, this is the formula:

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

0.07 = HK$8.2b ÷ (HK$197b - HK$80b) (Based on the trailing twelve months to June 2021).

Therefore, China State Construction International Holdings has an ROCE of 7.0%. On its own, that's a low figure but it's around the 7.9% average generated by the Construction industry.

See 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'd like to see what analysts are forecasting going forward, you should check out our free report for China State Construction International Holdings.

How Are Returns Trending?

In terms of China State Construction International Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.0% for the last five years, and the capital employed within the business has risen 164% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another thing to note, China State Construction International Holdings has a high ratio of current liabilities to total assets of 40%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On China State Construction International Holdings' ROCE

In summary, China State Construction International Holdings has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 19% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think China State Construction International Holdings has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with China State Construction International Holdings (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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.

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.

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