China Hongqiao Group's (HKG:1378) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. 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 when we looked at China Hongqiao Group (HKG:1378) and its trend of ROCE, we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Hongqiao Group:

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

0.19 = CN¥24b ÷ (CN¥188b - CN¥63b) (Based on the trailing twelve months to December 2021).

Therefore, China Hongqiao Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 14% generated by the Metals and Mining industry.

See our latest analysis for China Hongqiao Group

In the above chart we have measured China Hongqiao Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Hongqiao Group.

The Trend Of ROCE

We like the trends that we're seeing from China Hongqiao Group. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 35%. So we're very much inspired by what we're seeing at China Hongqiao Group thanks to its ability to profitably reinvest capital.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China Hongqiao Group has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 77% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing China Hongqiao Group that you might find interesting.

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.