China Conch Venture Holdings' (HKG:586) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at China Conch Venture Holdings (HKG:586), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Conch Venture Holdings, this is the formula:

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

0.025 = CN¥1.6b ÷ (CN¥72b - CN¥7.6b) (Based on the trailing twelve months to June 2022).

So, China Conch Venture Holdings has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.2%.

Our analysis indicates that 586 is potentially undervalued!

Above you can see how the current ROCE for China Conch Venture 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 Conch Venture Holdings.

How Are Returns Trending?

In terms of China Conch Venture Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.5% from 3.7% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that China Conch Venture Holdings is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 45% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

China Conch Venture Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.