Be Wary Of China Greenland Broad Greenstate Group (HKG:1253) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating China Greenland Broad Greenstate Group (HKG:1253), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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 China Greenland Broad Greenstate Group is:

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

0.021 = CN¥29m ÷ (CN¥3.4b - CN¥2.0b) (Based on the trailing twelve months to December 2021).

Therefore, China Greenland Broad Greenstate Group has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.0%.

View our latest analysis for China Greenland Broad Greenstate Group

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'd like to look at how China Greenland Broad Greenstate Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is China Greenland Broad Greenstate Group's ROCE Trending?

When we looked at the ROCE trend at China Greenland Broad Greenstate Group, we didn't gain much confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 2.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, China Greenland Broad Greenstate Group's current liabilities are still rather high at 59% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On China Greenland Broad Greenstate Group's ROCE

In summary, we're somewhat concerned by China Greenland Broad Greenstate Group's diminishing returns on increasing amounts of capital. We expect this has contributed to the stock plummeting 92% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 6 warning signs with China Greenland Broad Greenstate Group (at least 2 which are significant) , and understanding these would certainly be useful.

While China Greenland Broad Greenstate Group 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.