What Should Investors Know About Natural Beauty Bio-Technology Limited’s (HKG:157) Capital Returns?

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Natural Beauty Bio-Technology Limited (HKG:157) stock.

Natural Beauty Bio-Technology stock represents an ownership share in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to 157’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Natural Beauty Bio-Technology is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

See our latest analysis for Natural Beauty Bio-Technology

Calculating Return On Capital Employed for 157

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Natural Beauty Bio-Technology is good at growing investor capital. I have calculated Natural Beauty Bio-Technology’s ROCE for you below:

ROCE Calculation for 157

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = HK$135m ÷ (HK$786m – HK$175m) = 22%

157’s 22% ROCE means that for every HK$100 you invest, the company creates HK$22.1. This makes Natural Beauty Bio-Technology attractively profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a quick rate over time.

SEHK:157 Last Perf November 9th 18
SEHK:157 Last Perf November 9th 18

Before moving forward

157 is efficient with the use of capital, but this is only the case if 157 continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Natural Beauty Bio-Technology will continue the solid returns. Looking three years in the past, it is evident that 157’s ROCE has risen from 20%, indicating the company’s capital returns have stengthened. Over the same period, EBT went from HK$165m to HK$135m, but the use of capital has fallen further due to a fall in total assets employed , which means that although earnings are smaller than before, 157 requires less capital to produce each HK$1 of earnings.

Next Steps

ROCE for 157 investors has grown in the last few years and is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like the management team and valuation. It’s important to account for these factors because you cannot be sure if this trend will continue or reverse due to reasons that cannot be seen by looking in the past. Natural Beauty Bio-Technology’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Natural Beauty Bio-Technology’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  2. Valuation: What is 157 worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 157 is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.