Here's What To Make Of China Conch Venture Holdings' (HKG:586) Decelerating Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at China Conch Venture Holdings (HKG:586) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 China Conch Venture Holdings:

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

0.035 = CN¥1.9b ÷ (CN¥61b - CN¥7.0b) (Based on the trailing twelve months to June 2021).

Therefore, China Conch Venture Holdings has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.6%.

View our latest analysis for China Conch Venture Holdings

In the above chart we have measured China Conch Venture Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Conch Venture Holdings here for free.

So How Is China Conch Venture Holdings' ROCE Trending?

In terms of China Conch Venture Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.5% for the last five years, and the capital employed within the business has risen 206% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while China Conch Venture Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 57% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing China Conch Venture Holdings we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While China Conch Venture Holdings 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.