The Returns On Capital At Cabbeen Fashion (HKG:2030) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 briefly looking over the numbers, we don't think Cabbeen Fashion (HKG:2030) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Cabbeen Fashion, this is the formula:

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

0.17 = CN¥270m ÷ (CN¥2.4b - CN¥798m) (Based on the trailing twelve months to December 2020).

So, Cabbeen Fashion has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Luxury industry.

View 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.

How Are Returns Trending?

On the surface, the trend of ROCE at Cabbeen Fashion doesn't inspire confidence. Around five years ago the returns on capital were 42%, but since then they've fallen to 17%. 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 33% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line On 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. Furthermore the stock has climbed 60% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to know some of the risks facing Cabbeen Fashion we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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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