Here's What To Make Of China Greenland Broad Greenstate Group's (HKG:1253) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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. 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)

0.035 = CN¥44m ÷ (CN¥3.4b - CN¥2.2b) (Based on the trailing twelve months to June 2020).

So, China Greenland Broad Greenstate Group has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.9%.

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're interested in investigating China Greenland Broad Greenstate Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is China Greenland Broad Greenstate Group's ROCE 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 3.5% from 35% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, China Greenland Broad Greenstate Group has a high ratio of current liabilities to total assets of 64%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for China Greenland Broad Greenstate Group. Despite these promising trends, the stock has collapsed 80% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

China Greenland Broad Greenstate Group does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are concerning...

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. 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.
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