Investors Shouldn't Overlook China Tobacco International (HK)'s (HKG:6055) Impressive Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in China Tobacco International (HK)'s (HKG:6055) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for China Tobacco International (HK):

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

0.29 = HK$657m ÷ (HK$6.4b - HK$4.1b) (Based on the trailing twelve months to December 2022).

Therefore, China Tobacco International (HK) has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 4.4% earned by companies in a similar industry.

View our latest analysis for China Tobacco International (HK)

Above you can see how the current ROCE for China Tobacco International (HK) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Tobacco International (HK).

SWOT Analysis for China Tobacco International (HK)

What Can We Tell From China Tobacco International (HK)'s ROCE Trend?

China Tobacco International (HK)'s ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 62% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 64% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On China Tobacco International (HK)'s ROCE

In summary, we're delighted to see that China Tobacco International (HK) has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 28% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing China Tobacco International (HK) we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.