Here's What's Concerning About Huabao International Holdings' (HKG:336) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Huabao International Holdings (HKG:336) 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 Huabao International Holdings is:

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

0.073 = CN¥1.1b ÷ (CN¥17b - CN¥1.4b) (Based on the trailing twelve months to June 2022).

So, Huabao International Holdings has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

Check out the opportunities and risks within the HK Chemicals industry.

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

So How Is Huabao International Holdings' ROCE Trending?

When we looked at the ROCE trend at Huabao International Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.3% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

What We Can Learn From Huabao International Holdings' ROCE

In summary, Huabao International Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 3.1% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Huabao International Holdings (of which 1 is concerning!) that you should know about.

While Huabao 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.