Be Wary Of China Pipe Group (HKG:380) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at China Pipe Group (HKG:380), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Pipe Group is:

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

0.035 = HK$23m ÷ (HK$816m - HK$152m) (Based on the trailing twelve months to December 2020).

Thus, China Pipe Group has an ROCE of 3.5%. On its own, that's a low figure but it's around the 3.5% average generated by the Trade Distributors industry.

See our latest analysis for China Pipe Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Pipe Group's ROCE against it's prior returns. If you'd like to look at how China Pipe Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at China Pipe Group doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 3.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From China Pipe Group's ROCE

To conclude, we've found that China Pipe Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 42% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

China Pipe Group does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While China Pipe Group 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. 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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