Returns On Capital At China Starch Holdings (HKG:3838) Paint An Interesting Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at China Starch Holdings (HKG:3838) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

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

So, China Starch Holdings has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

Check out our latest analysis for China Starch Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Starch Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Starch Holdings, check out these free graphs here.

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

On the surface, the trend of ROCE at China Starch Holdings doesn't inspire confidence. Around five years ago the returns on capital were 8.7%, but since then they've fallen to 6.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for China Starch Holdings. Furthermore the stock has climbed 56% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

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

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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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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