Chinney Alliance Group's (HKG:385) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Chinney Alliance Group (HKG:385) 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. The formula for this calculation on Chinney Alliance Group is:

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

0.049 = HK$120m ÷ (HK$4.7b - HK$2.3b) (Based on the trailing twelve months to June 2022).

So, Chinney Alliance Group has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.0%.

View our latest analysis for Chinney Alliance Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chinney Alliance Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Chinney Alliance Group, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Chinney Alliance Group doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Chinney Alliance Group has a high ratio of current liabilities to total assets of 48%. 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.

Our Take On Chinney Alliance Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Chinney Alliance Group is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 55% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 4 warning signs we've spotted with Chinney Alliance Group (including 1 which is potentially serious) .

While Chinney Alliance Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.