There Are Reasons To Feel Uneasy About China Boton Group's (HKG:3318) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating China Boton Group (HKG:3318), we don't think it's current trends fit the mold of a multi-bagger.

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. 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).

So, China Boton Group has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 10%.

See 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 want to delve into the historical earnings, revenue and cash flow of China Boton Group, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at China Boton Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.5% from 7.9% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From China Boton Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for China Boton Group have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 37% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.