There Are Reasons To Feel Uneasy About China International Holdings' (SGX:BEH) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 China International Holdings (SGX:BEH), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for China International Holdings, this is the formula:

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

0.012 = CN¥6.9m ÷ (CN¥798m - CN¥200m) (Based on the trailing twelve months to December 2022).

Thus, China International Holdings has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 6.8%.

View our latest analysis for China International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China International Holdings, check out these free graphs here.

What Can We Tell From China International Holdings' ROCE Trend?

When we looked at the ROCE trend at China International Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.2% from 5.9% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, China International Holdings has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for China International Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. We expect this has contributed to the stock plummeting 77% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 3 warning signs facing China International Holdings that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.