Chinese People Holdings' (HKG:681) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Chinese People Holdings (HKG:681) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Chinese People Holdings:

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

0.04 = CN¥117m ÷ (CN¥3.5b - CN¥637m) (Based on the trailing twelve months to December 2020).

Thus, Chinese People Holdings has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 6.1%.

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 Does the ROCE Trend For Chinese People Holdings Tell Us?

There are better returns on capital out there than what we're seeing at Chinese People Holdings. The company has consistently earned 4.0% for the last five years, and the capital employed within the business has risen 62% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Chinese People Holdings' ROCE

As we've seen above, Chinese People Holdings' returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 55% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a separate note, we've found 1 warning sign for Chinese People Holdings you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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