Returns On Capital At China Conch Venture Holdings (HKG:586) Have Stalled

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on China Conch Venture Holdings is:

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%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.8%.

View our latest analysis for China Conch Venture Holdings

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, you can check out the forecasts from the analysts covering China Conch Venture Holdings here for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at China Conch Venture Holdings. 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.

Our Take On China Conch Venture Holdings' ROCE

Long story short, while China Conch Venture Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 138% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing China Conch Venture Holdings that you might find interesting.

While China Conch Venture Holdings 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.
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