Returns On Capital Are Showing Encouraging Signs At China Finance Investment Holdings (HKG:875)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, China Finance Investment Holdings (HKG:875) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for China Finance Investment Holdings, this is the formula:

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

0.018 = HK$8.2m ÷ (HK$1.3b - HK$869m) (Based on the trailing twelve months to June 2022).

Therefore, China Finance Investment Holdings has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Food industry average of 9.6%.

View our latest analysis for China Finance Investment Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Finance Investment Holdings' ROCE against it's prior returns. If you'd like to look at how China Finance Investment Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

China Finance Investment Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 1.8% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 66% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On China Finance Investment Holdings' ROCE

As discussed above, China Finance Investment Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 19% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing China Finance Investment Holdings we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.

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. 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.