Returns On Capital At Country Garden Services Holdings (HKG:6098) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after investigating Country Garden Services Holdings (HKG:6098), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Country Garden Services Holdings is:

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

0.20 = CN¥3.3b ÷ (CN¥31b - CN¥14b) (Based on the trailing twelve months to December 2020).

Thus, Country Garden Services Holdings has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 9.1% it's much better.

Check out our latest analysis for Country Garden Services Holdings

Above you can see how the current ROCE for Country Garden Services Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Country Garden Services Holdings.

The Trend Of ROCE

On the surface, the trend of ROCE at Country Garden Services Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 51% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Country Garden Services Holdings has decreased its current liabilities to 46% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Country Garden Services Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Country Garden Services Holdings is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 450% to shareholders in the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 3 warning signs facing Country Garden Services Holdings that you might find interesting.

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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