Capital Allocation Trends At China Greenland Broad Greenstate Group (HKG:1253) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at China Greenland Broad Greenstate Group (HKG:1253) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Greenland Broad Greenstate Group, this is the formula:

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).

Thus, 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 8.2%.

Our analysis indicates that 1253 is potentially undervalued!

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, revenue and cash flow of China Greenland Broad Greenstate Group, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at China Greenland Broad Greenstate Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.1% from 29% five years ago. 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 separate but related note, it's important to know that China Greenland Broad Greenstate Group has a current liabilities to total assets ratio of 63%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

We're a bit apprehensive about China Greenland Broad Greenstate Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. We expect this has contributed to the stock plummeting 89% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

China Greenland Broad Greenstate Group does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those shouldn't be ignored...

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.