Returns On Capital Signal Tricky Times Ahead For Ingdan (HKG:400)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Ingdan (HKG:400), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Ingdan, this is the formula:

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

0.092 = CN¥476m ÷ (CN¥7.8b - CN¥2.6b) (Based on the trailing twelve months to December 2021).

Thus, Ingdan has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 6.1% generated by the Online Retail industry, it's much better.

See our latest analysis for Ingdan

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ingdan's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ingdan's ROCE Trend?

On the surface, the trend of ROCE at Ingdan doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.2% from 16% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Ingdan has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Ingdan's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ingdan is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 61% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Ingdan, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Ingdan 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.