China Greenland Broad Greenstate Group (HKG:1253) Is Reinvesting At Lower Rates Of Return

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at China Greenland Broad Greenstate Group (HKG:1253) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for China Greenland Broad Greenstate Group:

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

0.067 = CN¥87m ÷ (CN¥3.5b - CN¥2.2b) (Based on the trailing twelve months to December 2020).

So, China Greenland Broad Greenstate Group has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.3%.

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 want to delve into the historical earnings, revenue and cash flow of China Greenland Broad Greenstate Group, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at China Greenland Broad Greenstate Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.7% from 33% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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 62% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

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. This could explain why the stock has sunk a total of 77% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 2 warning signs facing China Greenland Broad Greenstate Group that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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