Here's What To Make Of Chinese People Holdings' (HKG:681) Decelerating Rates Of Return

By
Simply Wall St
Published
September 07, 2021
SEHK:681
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. 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.

Understanding 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 Chinese People Holdings:

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

0.043 = CN¥124m ÷ (CN¥3.5b - CN¥637m) (Based on the trailing twelve months to December 2020).

So, Chinese People Holdings has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 8.2%.

See our latest analysis for Chinese People Holdings

roce
SEHK:681 Return on Capital Employed September 8th 2021

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'd like to look at how Chinese People Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Chinese People Holdings. The company has consistently earned 4.3% for the last five years, and the capital employed within the business has risen 62% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In conclusion, Chinese People Holdings has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 52% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Chinese People Holdings has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Chinese People Holdings and understanding this should be part of your investment process.

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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