Stock Analysis

Our Take On The Returns On Capital At Pizu Group Holdings (HKG:8053)

SEHK:8053
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Pizu Group Holdings (HKG:8053), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. The formula for this calculation on Pizu Group Holdings is:

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

0.41 = CN¥517m ÷ (CN¥1.8b - CN¥559m) (Based on the trailing twelve months to September 2020).

Thus, Pizu Group Holdings has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Construction industry average of 10%.

View our latest analysis for Pizu Group Holdings

roce
SEHK:8053 Return on Capital Employed December 1st 2020

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

How Are Returns Trending?

When we looked at the ROCE trend at Pizu Group Holdings, we didn't gain much confidence. Historically returns on capital were even higher at 55%, but they have dropped over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Pizu Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 248% 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.

On a separate note, we've found 1 warning sign for Pizu Group Holdings you'll probably want to know about.

Pizu Group Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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