China Investments Holdings (HKG:132) Is Experiencing Growth In 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. So when we looked at China Investments Holdings (HKG:132) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Investments Holdings:

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

0.016 = HK$101m ÷ (HK$8.3b - HK$1.9b) (Based on the trailing twelve months to December 2021).

So, China Investments Holdings has an ROCE of 1.6%. Even though it's in line with the industry average of 2.2%, it's still a low return by itself.

View our latest analysis for China Investments Holdings

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

What The Trend Of ROCE Can Tell Us

The fact that China Investments Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.6% which is a sight for sore eyes. Not only that, but the company is utilizing 449% more capital than before, but that's to be expected from a company trying to break into profitability. 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 23% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On China Investments Holdings' ROCE

Long story short, we're delighted to see that China Investments Holdings' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 29% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about China Investments Holdings, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

While China Investments Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.