Returns On Capital Are Showing Encouraging Signs At China State Construction Development Holdings (HKG:830)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in China State Construction Development Holdings' (HKG:830) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China State Construction Development Holdings is:

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

0.10 = HK$274m ÷ (HK$7.4b - HK$4.6b) (Based on the trailing twelve months to December 2020).

Therefore, China State Construction Development Holdings has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Building industry average of 9.5%.

Check out our latest analysis for China State Construction Development Holdings

In the above chart we have measured China State Construction Development Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China State Construction Development Holdings.

How Are Returns Trending?

Investors would be pleased with what's happening at China State Construction Development Holdings. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 132%. So we're very much inspired by what we're seeing at China State Construction Development Holdings thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 63% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China State Construction Development Holdings has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 10% to shareholders. So with that in mind, we think the stock deserves further research.

China State Construction Development Holdings does have some risks though, and we've spotted 3 warning signs for China State Construction Development Holdings that you might be interested in.

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. 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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