Is There More Growth In Store For South China Holdings' (HKG:413) Returns On Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in South China Holdings' (HKG:413) returns on capital, so let's have a look.

What is 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 South China Holdings, this is the formula:

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

0.01 = HK$98m ÷ (HK$14b - HK$3.9b) (Based on the trailing twelve months to June 2020).

Therefore, South China Holdings has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 9.1%.

Check out our latest analysis for South China Holdings

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 South China Holdings, check out these free graphs here.

What Can We Tell From South China Holdings' ROCE Trend?

South China Holdings has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.0% on its capital. And unsurprisingly, like most companies trying to break into the black, South China Holdings is utilizing 33% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

Overall, South China Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. However the stock is down a substantial 73% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

South China Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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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