Returns On Capital Are Showing Encouraging Signs At Asia Cement (China) Holdings (HKG:743)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at Asia Cement (China) Holdings (HKG:743) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Asia Cement (China) Holdings is:

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

0.19 = CN¥3.6b ÷ (CN¥22b - CN¥2.8b) (Based on the trailing twelve months to December 2020).

So, Asia Cement (China) Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 15% generated by the Basic Materials industry.

View our latest analysis for Asia Cement (China) Holdings

Above you can see how the current ROCE for Asia Cement (China) Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Asia Cement (China) Holdings Tell Us?

Asia Cement (China) Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 43% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 13%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Asia Cement (China) Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Asia Cement (China) Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Asia Cement (China) Holdings has. Since the stock has returned a staggering 503% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Asia Cement (China) Holdings can keep these trends up, it could have a bright future ahead.

Like most companies, Asia Cement (China) Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Asia Cement (China) 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. 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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