Under The Bonnet, China Hanking Holdings' (HKG:3788) Returns Look Impressive

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at China Hanking Holdings' (HKG:3788) look very promising so lets take a 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 China Hanking Holdings is:

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

0.50 = CN¥541m ÷ (CN¥2.8b - CN¥1.7b) (Based on the trailing twelve months to June 2020).

Thus, China Hanking Holdings has an ROCE of 50%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 7.5%.

Check out our latest analysis for China Hanking Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Hanking Holdings' ROCE against it's prior returns. If you'd like to look at how China Hanking Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

China Hanking Holdings has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 2,739%. The company is now earning CN¥0.5 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 47% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a separate but related note, it's important to know that China Hanking Holdings has a current liabilities to total assets ratio of 61%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On China Hanking Holdings' ROCE

In summary, it's great to see that China Hanking Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 50% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

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

China Hanking Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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