Our Take On The Returns On Capital At Huajin International Holdings (HKG:2738)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Huajin International Holdings (HKG:2738) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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 Huajin International Holdings is:

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

0.016 = CN¥16m ÷ (CN¥1.7b - CN¥682m) (Based on the trailing twelve months to June 2020).

Therefore, Huajin International Holdings has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.5%.

Check out our latest analysis for Huajin International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huajin International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Huajin International Holdings, check out these free graphs here.

What Can We Tell From Huajin International Holdings' ROCE Trend?

When we looked at the ROCE trend at Huajin International Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 45%, but since then they've fallen to 1.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Huajin International Holdings has done well to pay down its current liabilities to 40% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, we're somewhat concerned by Huajin International Holdings' diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Huajin International Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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