China Golden Classic Group (HKG:8281) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at China Golden Classic Group (HKG:8281) and its ROCE trend, we weren't exactly thrilled.

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 China Golden Classic Group is:

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

0.071 = CN¥17m ÷ (CN¥326m - CN¥89m) (Based on the trailing twelve months to September 2021).

Therefore, China Golden Classic Group has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.

See our latest analysis for China Golden Classic Group

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

So How Is China Golden Classic Group's ROCE Trending?

On the surface, the trend of ROCE at China Golden Classic Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.1% from 17% five years ago. However it looks like China Golden Classic Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, China Golden Classic Group has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On China Golden Classic Group's ROCE

To conclude, we've found that China Golden Classic Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 33% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 2 warning signs with China Golden Classic Group and understanding them should be part of your investment process.

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. 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.