South China Holdings (HKG:413) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating South China Holdings (HKG:413), we don't think it's current trends fit the mold of a multi-bagger.

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)

0.0083 = HK$97m ÷ (HK$16b - HK$4.0b) (Based on the trailing twelve months to December 2021).

Thus, South China Holdings has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Leisure industry average of 3.7%.

See our latest analysis for South China Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for South China Holdings' ROCE against it's prior returns. If you're interested in investigating South China Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

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

In terms of South China Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 1.8%, but since then they've fallen to 0.8%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On South China Holdings' ROCE

While returns have fallen for South China Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 75% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you want to know some of the risks facing South China Holdings we've found 5 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While South China Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.