Chin Hin Group Berhad (KLSE:CHINHIN) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Chin Hin Group Berhad (KLSE:CHINHIN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on Chin Hin Group Berhad is:

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

0.031 = RM33m ÷ (RM2.0b - RM971m) (Based on the trailing twelve months to December 2022).

So, Chin Hin Group Berhad has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 8.9%.

See our latest analysis for Chin Hin Group Berhad

Above you can see how the current ROCE for Chin Hin Group Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Chin Hin Group Berhad here for free.

What Does the ROCE Trend For Chin Hin Group Berhad Tell Us?

On the surface, the trend of ROCE at Chin Hin Group Berhad doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 3.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Chin Hin Group Berhad has a current liabilities to total assets ratio of 48%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Chin Hin Group Berhad is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 1,060% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Chin Hin Group Berhad (of which 2 are a bit unpleasant!) that you should know about.

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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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.