Huabao International Holdings' (HKG:336) Returns On Capital Not Reflecting Well On The Business

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Huabao International Holdings (HKG:336) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Huabao International Holdings:

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

0.095 = CN¥1.5b ÷ (CN¥18b - CN¥2.0b) (Based on the trailing twelve months to December 2020).

So, Huabao International Holdings has an ROCE of 9.5%. Even though it's in line with the industry average of 9.5%, it's still a low return by itself.

Check out our latest analysis for Huabao International Holdings

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?

In terms of Huabao International Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. However it looks like Huabao International Holdings 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.

In Conclusion...

To conclude, we've found that Huabao International Holdings is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 847% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 4 warning signs we've spotted with Huabao International Holdings (including 1 which doesn't sit too well with us) .

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.

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