Chinlink International Holdings (HKG:997) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Chinlink International Holdings' (HKG:997) returns on capital, so let's have a look.

Understanding 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 Chinlink International Holdings:

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

0.012 = HK$40m ÷ (HK$5.3b - HK$1.8b) (Based on the trailing twelve months to March 2021).

Therefore, Chinlink International Holdings has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 3.6%.

Check out our latest analysis for Chinlink International 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're interested in investigating Chinlink International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Chinlink International Holdings' ROCE Trending?

Chinlink International Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.2% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Chinlink International Holdings is utilizing 70% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line

Long story short, we're delighted to see that Chinlink International Holdings' reinvestment activities have paid off and the company is now profitable. And since the stock has dived 98% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Chinlink International Holdings does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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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