We Like These Underlying Return On Capital Trends At Chen Hsong Holdings (HKG:57)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Chen Hsong Holdings' (HKG:57) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Chen Hsong Holdings:

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

0.01 = HK$29m ÷ (HK$3.9b - HK$946m) (Based on the trailing twelve months to September 2020).

Thus, Chen Hsong Holdings has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.8%.

Check out our latest analysis for Chen Hsong Holdings

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

What Does the ROCE Trend For Chen Hsong Holdings Tell Us?

We're delighted to see that Chen Hsong Holdings is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.0% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

What We Can Learn From Chen Hsong Holdings' ROCE

To bring it all together, Chen Hsong Holdings has done well to increase the returns it's generating from its capital employed. And with a respectable 84% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 2 warning signs for Chen Hsong Holdings that we think you should be aware of.

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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