Is China Starch Holdings (HKG:3838) Likely To Turn Things Around?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating China Starch Holdings (HKG:3838), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Starch Holdings, this is the formula:

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

0.06 = CN¥204m ÷ (CN¥4.6b - CN¥1.2b) (Based on the trailing twelve months to June 2020).

Thus, China Starch Holdings has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 14%.

Check out 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're interested in investigating China Starch Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Starch Holdings' ROCE Trend?

When we looked at the ROCE trend at China Starch Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 8.7%, but since then they've fallen to 6.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that China Starch Holdings is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 25% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, China Starch Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While China Starch Holdings 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. 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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