China Starch Holdings (HKG:3838) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in China Starch Holdings' (HKG:3838) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Starch Holdings:

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

0.076 = CN¥265m ÷ (CN¥4.6b - CN¥1.1b) (Based on the trailing twelve months to December 2020).

Thus, China Starch Holdings has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

View our latest analysis for China Starch Holdings

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 Starch 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

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 65% more capital is being employed now too. So we're very much inspired by what we're seeing at China Starch Holdings thanks to its ability to profitably reinvest capital.

The Bottom Line

All in all, it's terrific to see that China Starch Holdings is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 47% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

China Starch Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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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