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 briefly looking over the numbers, we don't think China Greenland Broad Greenstate Group (HKG:1253) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Greenland Broad Greenstate Group is:

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

0.021 = CN¥26m ÷ (CN¥3.4b - CN¥2.1b) (Based on the trailing twelve months to June 2022).

So, China Greenland Broad Greenstate Group has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.2%.

See our latest analysis for China Greenland Broad Greenstate Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Greenland Broad Greenstate Group's ROCE against it's prior returns. 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.

The Trend Of ROCE

When we looked at the ROCE trend at China Greenland Broad Greenstate Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 30% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, China Greenland Broad Greenstate Group's current liabilities are still rather high at 63% 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.

What We Can Learn From China Greenland Broad Greenstate Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for China Greenland Broad Greenstate Group have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 80% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing China Greenland Broad Greenstate Group we've found 4 warning signs (3 are significant!) that you should be aware of before investing here.

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. 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.