Chow Sang Sang Holdings International (HKG:116) Hasn't Managed To Accelerate Its Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Chow Sang Sang Holdings International (HKG:116) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Chow Sang Sang Holdings International, this is the formula:

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

0.072 = HK$986m ÷ (HK$18b - HK$4.2b) (Based on the trailing twelve months to June 2022).

Therefore, Chow Sang Sang Holdings International has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.9%.

Our analysis indicates that 116 is potentially undervalued!

In the above chart we have measured Chow Sang Sang Holdings International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Chow Sang Sang Holdings International here for free.

What Does the ROCE Trend For Chow Sang Sang Holdings International Tell Us?

There are better returns on capital out there than what we're seeing at Chow Sang Sang Holdings International. The company has employed 34% more capital in the last five years, and the returns on that capital have remained stable at 7.2%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In summary, Chow Sang Sang Holdings International has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 43% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Chow Sang Sang Holdings International, we've discovered 2 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.