China State Construction Development Holdings (HKG:830) Knows How To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So, when we ran our eye over China State Construction Development Holdings' (HKG:830) trend of ROCE, we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for China State Construction Development Holdings:

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

0.20 = HK$700m ÷ (HK$11b - HK$7.5b) (Based on the trailing twelve months to June 2023).

Thus, China State Construction Development Holdings has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 9.2% earned by companies in a similar industry.

See our latest analysis for China State Construction Development Holdings

Above you can see how the current ROCE for China State Construction Development Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China State Construction Development Holdings .

What Does the ROCE Trend For China State Construction Development Holdings Tell Us?

It's hard not to be impressed by China State Construction Development Holdings' returns on capital. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 188% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If China State Construction Development Holdings can keep this up, we'd be very optimistic about its future.

Another thing to note, China State Construction Development Holdings has a high ratio of current liabilities to total assets of 68%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In short, we'd argue China State Construction Development Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 154% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with China State Construction Development Holdings and understanding this should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.