Can Chinese People Holdings (HKG:681) Continue To Grow Its Returns On Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Chinese People Holdings (HKG:681) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chinese People Holdings:

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

0.042 = CN¥116m ÷ (CN¥3.4b - CN¥595m) (Based on the trailing twelve months to September 2020).

Therefore, Chinese People Holdings has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.8%.

See our latest analysis for Chinese People Holdings

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

What Can We Tell From Chinese People Holdings' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 37% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Chinese People Holdings' ROCE

All in all, it's terrific to see that Chinese People Holdings is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 52% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Chinese People Holdings does have some risks though, and we've spotted 2 warning signs for Chinese People Holdings that you might be interested in.

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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