There Are Reasons To Feel Uneasy About Country Garden Services Holdings' (HKG:6098) Returns On Capital

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Country Garden Services Holdings (HKG:6098) 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 Country Garden Services Holdings, this is the formula:

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%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Commercial Services industry.

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, you can check out the forecasts from the analysts covering Country Garden Services Holdings here for free.

What The Trend Of ROCE Can Tell Us

In terms of Country Garden Services Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 20% from 51% five years ago. 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. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 the stock has done incredibly well with a 115% return over the last year, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Country Garden Services Holdings, we've discovered 3 warning signs that you should be aware of.

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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