Be Wary Of China Resources Building Materials Technology Holdings (HKG:1313) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think China Resources Building Materials Technology Holdings (HKG:1313) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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. To calculate this metric for China Resources Building Materials Technology Holdings, this is the formula:

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

0.013 = CN¥745m ÷ (CN¥72b - CN¥16b) (Based on the trailing twelve months to December 2024).

So, China Resources Building Materials Technology Holdings has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 2.5%.

See our latest analysis for China Resources Building Materials Technology Holdings

In the above chart we have measured China Resources Building Materials Technology Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Resources Building Materials Technology Holdings .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at China Resources Building Materials Technology Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.3% from 23% five years ago. However it looks like China Resources Building Materials Technology Holdings 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On China Resources Building Materials Technology Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by China Resources Building Materials Technology Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 77% over the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 1 warning sign for China Resources Building Materials Technology Holdings that we think you should be aware of.

While China Resources Building Materials Technology Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.