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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at China Greenland Broad Greenstate Group (HKG:1253), it didn't seem to tick all of these boxes.

Understanding 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. 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)

0.029 = CN¥38m ÷ (CN¥3.4b - CN¥2.1b) (Based on the trailing twelve months to June 2021).

So, China Greenland Broad Greenstate Group has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.1%.

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

What Does the ROCE Trend For China Greenland Broad Greenstate Group Tell Us?

In terms of China Greenland Broad Greenstate Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 34% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

Another thing to note, China Greenland Broad Greenstate Group has a high ratio of current liabilities to total assets of 61%. 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 85% 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.

China Greenland Broad Greenstate Group does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.

While China Greenland Broad Greenstate Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.