Be Wary Of China Boton Group (HKG:3318) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after briefly looking over the numbers, we don't think China Boton Group (HKG:3318) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for China Boton Group, this is the formula:

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

0.055 = CN¥258m ÷ (CN¥6.4b - CN¥1.8b) (Based on the trailing twelve months to June 2023).

Thus, China Boton Group has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.3%.

View our latest analysis for China Boton Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Boton Group's ROCE against it's prior returns. If you're interested in investigating China Boton Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Boton Group's ROCE Trend?

When we looked at the ROCE trend at China Boton Group, we didn't gain much confidence. Around five years ago the returns on capital were 7.9%, but since then they've fallen to 5.5%. However it looks like China Boton Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by China Boton Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 58% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think China Boton Group has the makings of a multi-bagger.

China Boton Group does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those make us uncomfortable...

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. 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.