The Returns On Capital At Haidilao International Holding (HKG:6862) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Haidilao International Holding (HKG:6862) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 Haidilao International Holding:

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

0.067 = CN¥1.2b ÷ (CN¥28b - CN¥9.9b) (Based on the trailing twelve months to December 2020).

Therefore, Haidilao International Holding has an ROCE of 6.7%. On its own that's a low return, but compared to the average of 3.1% generated by the Hospitality industry, it's much better.

Check out our latest analysis for Haidilao International Holding

Above you can see how the current ROCE for Haidilao International Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Haidilao International Holding here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Haidilao International Holding doesn't inspire confidence. Around five years ago the returns on capital were 48%, but since then they've fallen to 6.7%. However it looks like Haidilao International Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Haidilao International Holding has decreased its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Haidilao International Holding's ROCE

Bringing it all together, while we're somewhat encouraged by Haidilao International Holding's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 18% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Haidilao International Holding we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While Haidilao International Holding 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. 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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