The Returns On Capital At Chin Hin Group Berhad (KLSE:CHINHIN) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Chin Hin Group Berhad (KLSE:CHINHIN) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chin Hin Group Berhad:

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

0.035 = RM40m ÷ (RM2.2b - RM1.1b) (Based on the trailing twelve months to March 2023).

Thus, Chin Hin Group Berhad has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 8.3%.

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 of past earnings, revenue and cash flow.

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

In terms of Chin Hin Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.1% over the last five years. 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 separate but related note, it's important to know that Chin Hin Group Berhad has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Chin Hin Group Berhad. And long term investors must be optimistic going forward because the stock has returned a huge 1,602% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Chin Hin Group Berhad we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.