Here's What's Concerning About China Hongqiao Group's (HKG:1378) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into China Hongqiao Group (HKG:1378), the trends above didn't look too great.

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)

0.024 = CN¥2.8b ÷ (CN¥189b - CN¥73b) (Based on the trailing twelve months to June 2023).

So, China Hongqiao Group has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.4%.

See our latest analysis for China Hongqiao Group

Above you can see how the current ROCE for China Hongqiao Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Hongqiao Group.

What Does the ROCE Trend For China Hongqiao Group Tell Us?

We are a bit worried about the trend of returns on capital at China Hongqiao Group. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect China Hongqiao Group to turn into a multi-bagger.

What We Can Learn From China Hongqiao Group's ROCE

In summary, it's unfortunate that China Hongqiao Group is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 111% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

China Hongqiao Group does have some risks though, and we've spotted 2 warning signs for China Hongqiao Group that you might be interested in.

While China Hongqiao Group 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.