Returns On Capital At Chin Hin Group Berhad (KLSE:CHINHIN) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 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.

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 Chin Hin Group Berhad is:

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

0.049 = RM117m ÷ (RM4.3b - RM1.9b) (Based on the trailing twelve months to June 2024).

Thus, Chin Hin Group Berhad has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 7.8%.

See our latest analysis for Chin Hin Group Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chin Hin Group Berhad's ROCE against it's prior returns. If you're interested in investigating Chin Hin Group Berhad's past further, check out this free graph covering Chin Hin Group Berhad's past earnings, revenue and cash flow.

So How Is Chin Hin Group Berhad's ROCE Trending?

When we looked at the ROCE trend at Chin Hin Group Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 8.3%, but since then they've fallen to 4.9%. 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, Chin Hin Group Berhad has decreased its current liabilities to 44% of total assets. That could partly explain why the ROCE has dropped. 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. Keep in mind 44% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Chin Hin Group Berhad's ROCE

While returns have fallen for Chin Hin Group Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 1,628% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Chin Hin Group Berhad, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Chin Hin Group Berhad 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.