Returns On Capital Are Showing Encouraging Signs At Champion Alliance International Holdings (HKG:1629)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Champion Alliance International Holdings' (HKG:1629) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
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 Champion Alliance International Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥52m ÷ (CN¥450m - CN¥63m) (Based on the trailing twelve months to December 2022).
So, Champion Alliance International Holdings has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 6.6% it's much better.
See 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're interested in investigating Champion Alliance International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Champion Alliance International Holdings Tell Us?
We like the trends that we're seeing from Champion Alliance International Holdings. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 228%. So we're very much inspired by what we're seeing at Champion Alliance International Holdings thanks to its ability to profitably reinvest capital.
One more thing to note, Champion Alliance International Holdings has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line
To sum it up, Champion Alliance International Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has dived 85% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
Champion Alliance International Holdings does have some risks though, and we've spotted 1 warning sign for Champion Alliance International Holdings that you might be interested in.
While Champion Alliance International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
About SEHK:1629
Champion Alliance International Holdings
An investment holding company, engages in the production and sale of energy in the People's Republic of China.
Flawless balance sheet and good value.