Be Wary Of Asia Cassava Resources Holdings (HKG:841) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Asia Cassava Resources Holdings (HKG:841) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Asia Cassava Resources Holdings:

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

0.032 = HK$37m ÷ (HK$1.9b - HK$752m) (Based on the trailing twelve months to September 2020).

Therefore, Asia Cassava Resources Holdings has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 13%.

View our latest analysis for Asia Cassava Resources 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 Asia Cassava Resources Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Asia Cassava Resources Holdings' ROCE Trending?

When we looked at the ROCE trend at Asia Cassava Resources Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for Asia Cassava Resources Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 50% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Asia Cassava Resources Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...

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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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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