Champion Alliance International Holdings (HKG:1629) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Having said that, from a first glance at Champion Alliance International Holdings (HKG:1629) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Champion Alliance International Holdings is:

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

0.092 = CN¥11m ÷ (CN¥433m - CN¥309m) (Based on the trailing twelve months to December 2020).

Thus, Champion Alliance International Holdings has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 6.7% generated by the Packaging industry, it's much better.

Check out our latest analysis for Champion Alliance International Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Champion Alliance International Holdings, check out these free graphs here.

How Are Returns Trending?

In terms of Champion Alliance International Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 48%, but since then they've fallen to 9.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 separate but related note, it's important to know that Champion Alliance International Holdings has a current liabilities to total assets ratio of 71%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Champion Alliance International Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 84% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Champion Alliance International Holdings that you might find interesting.

While Champion Alliance International 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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