Capital Allocation Trends At China Lilang (HKG:1234) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating China Lilang (HKG:1234), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for China Lilang:

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

0.13 = CN¥622m ÷ (CN¥6.5b - CN¥1.7b) (Based on the trailing twelve months to June 2024).

Therefore, China Lilang has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 12%.

Check out our latest analysis for China Lilang

In the above chart we have measured China Lilang'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 China Lilang for free.

What Can We Tell From China Lilang's ROCE Trend?

On the surface, the trend of ROCE at China Lilang doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 28% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From China Lilang's ROCE

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 Lilang. These trends are starting to be recognized by investors since the stock has delivered a 15% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know about the risks facing China Lilang, we've discovered 1 warning sign 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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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.