Returns On Capital At Cabbeen Fashion (HKG:2030) Paint An Interesting Picture

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Cabbeen Fashion (HKG:2030) and its ROCE trend, we weren't exactly thrilled.

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 Cabbeen Fashion:

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

0.14 = CN¥238m ÷ (CN¥2.2b - CN¥597m) (Based on the trailing twelve months to June 2020).

Thus, Cabbeen Fashion has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Luxury industry.

See our latest analysis for Cabbeen Fashion

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 want to delve into the historical earnings, revenue and cash flow of Cabbeen Fashion, check out these free graphs here.

What Can We Tell From Cabbeen Fashion's ROCE Trend?

On the surface, the trend of ROCE at Cabbeen Fashion doesn't inspire confidence. To be more specific, ROCE has fallen from 43% over the last five years. 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.

On a related note, Cabbeen Fashion has decreased its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From Cabbeen Fashion's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Cabbeen Fashion is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 13% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Cabbeen Fashion does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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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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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