Returns Are Gaining Momentum At Chindata Group Holdings (NASDAQ:CD)

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Chindata Group Holdings' (NASDAQ:CD) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Chindata Group Holdings:

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

0.054 = CN¥967m ÷ (CN¥21b - CN¥2.9b) (Based on the trailing twelve months to June 2022).

Thus, Chindata Group Holdings has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

Check out our latest analysis for Chindata Group Holdings

In the above chart we have measured Chindata Group Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

The fact that Chindata Group Holdings is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 5.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Chindata Group Holdings is utilizing 361% more capital than it was three years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Key Takeaway

Overall, Chindata Group Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 12% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Chindata Group Holdings does have some risks though, and we've spotted 1 warning sign for Chindata Group Holdings that you might be interested in.

While Chindata Group Holdings 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.