Stock Analysis

There's Been No Shortage Of Growth Recently For Chia Tai Enterprises International's (HKG:3839) Returns On Capital

SEHK:3839
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If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Chia Tai Enterprises International (HKG:3839) looks quite promising in regards to its trends of return on capital.

Understanding 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. The formula for this calculation on Chia Tai Enterprises International is:

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

0.018 = US$4.9m ÷ (US$351m - US$77m) (Based on the trailing twelve months to December 2022).

Therefore, Chia Tai Enterprises International has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.7%.

Check out our latest analysis for Chia Tai Enterprises International

roce
SEHK:3839 Return on Capital Employed April 17th 2023

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chia Tai Enterprises International's ROCE against it's prior returns. If you're interested in investigating Chia Tai Enterprises International's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Chia Tai Enterprises International's ROCE Trend?

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 data shows that returns on capital have increased substantially over the last five years to 1.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 28%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 22% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

To sum it up, Chia Tai Enterprises International has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 13% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Chia Tai Enterprises International (of which 2 don't sit too well with us!) that you should know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Chia Tai Enterprises International is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.