Investors Could Be Concerned With Chinney Alliance Group's (HKG:385) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chinney Alliance Group:

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

0.054 = HK$132m ÷ (HK$4.9b - HK$2.5b) (Based on the trailing twelve months to December 2021).

Therefore, Chinney Alliance Group has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.8%.

Check out 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'd like to look at how Chinney Alliance Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Chinney Alliance Group, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Chinney Alliance Group has a current liabilities to total assets ratio of 50%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line 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. These growth trends haven't led to growth returns though, since the stock has fallen 31% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Chinney Alliance Group does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

While Chinney Alliance 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. 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.