China Hongguang Holdings (HKG:8646) Will Want To Turn Around Its Return Trends

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at China Hongguang Holdings (HKG:8646), it didn't seem to tick all of these boxes.

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What Is Return On Capital Employed (ROCE)?

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 Hongguang Holdings:

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

0.08 = CN¥28m ÷ (CN¥469m - CN¥123m) (Based on the trailing twelve months to December 2024).

So, China Hongguang Holdings has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Building industry average of 9.3%.

See our latest analysis for China Hongguang Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Hongguang Holdings.

The Trend Of ROCE

We weren't thrilled with the trend because China Hongguang Holdings' ROCE has reduced by 73% over the last five years, while the business employed 196% more capital. Usually this isn't ideal, but given China Hongguang Holdings conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with China Hongguang Holdings' earnings and if they change as a result from the capital raise.

On a related note, China Hongguang Holdings has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that China Hongguang Holdings is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 56% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, China Hongguang Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

While China Hongguang 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.