We Like These Underlying Return On Capital Trends At Carrianna Group Holdings (HKG:126)

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Carrianna Group Holdings (HKG:126) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Carrianna Group Holdings, this is the formula:

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

0.033 = HK$152m ÷ (HK$6.7b - HK$2.1b) (Based on the trailing twelve months to September 2020).

Therefore, Carrianna Group Holdings has an ROCE of 3.3%. Even though it's in line with the industry average of 2.8%, it's still a low return by itself.

View our latest analysis for Carrianna Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Carrianna Group Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Carrianna Group Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

While there are companies with higher returns on capital out there, we still find the trend at Carrianna Group Holdings promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 24% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line

As discussed above, Carrianna Group Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 16% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 6 warning signs for Carrianna Group Holdings (1 doesn't sit too well with us) you should be aware of.

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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