China Golden Classic Group (HKG:8281) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at China Golden Classic Group (HKG:8281) and its ROCE trend, we weren't exactly thrilled.

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

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)

0.084 = CN¥20m ÷ (CN¥359m - CN¥122m) (Based on the trailing twelve months to March 2021).

Therefore, China Golden Classic Group has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Personal Products industry average of 10%.

Check out 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.

What The Trend Of ROCE Can Tell Us

In terms of China Golden Classic Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 31% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, China Golden Classic Group has decreased its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for China Golden Classic Group. Despite these promising trends, the stock has collapsed 72% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you want to know some of the risks facing China Golden Classic Group we've found 3 warning signs (1 is a bit unpleasant!) 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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