China Qinfa Group (HKG:866) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at China Qinfa Group (HKG:866) and its trend of ROCE, we really liked what we saw.

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 China Qinfa Group:

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

0.16 = CN¥413m ÷ (CN¥7.7b - CN¥5.2b) (Based on the trailing twelve months to June 2024).

So, China Qinfa Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Oil and Gas industry.

Check out our latest analysis for China Qinfa Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how China Qinfa Group has performed in the past in other metrics, you can view this free graph of China Qinfa Group's past earnings, revenue and cash flow.

So How Is China Qinfa Group's ROCE Trending?

We're delighted to see that China Qinfa Group is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 16% which is no doubt a relief for some early shareholders. In regards to capital employed, China Qinfa Group is using 39% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. China Qinfa Group could be selling under-performing assets since the ROCE is improving.

On a side note, China Qinfa Group's current liabilities are still rather high at 67% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In a nutshell, we're pleased to see that China Qinfa Group has been able to generate higher returns from less capital. And a remarkable 491% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, China Qinfa Group does come with some risks, and we've found 2 warning signs that you should be aware of.

While China Qinfa Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.