Returns On Capital At China State Construction International Holdings (HKG:3311) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in…

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after investigating China State Construction International Holdings (HKG:3311), we don’t think it’s current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for China State Construction International Holdings:

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

0.069 = HK$7.4b ÷ (HK$187b – HK$80b) (Based on the trailing twelve months to December 2020).

Therefore, China State Construction International Holdings has an ROCE of 6.9%. Even though it’s in line with the industry average of 7.4%, it’s still a low return by itself.

See our latest analysis for China State Construction International Holdings

SEHK:3311 Return on Capital Employed August 9th 2021

Above you can see how the current ROCE for China State Construction International Holdings compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For China State Construction International Holdings Tell Us?

When we looked at the ROCE trend at China State Construction International Holdings, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 6.9% from 9.9% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, China State Construction International Holdings has a high ratio of current liabilities to total assets of 43%. 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.

Our Take On China State Construction International Holdings’ ROCE

In summary, China State Construction International Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last five years. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 2 warning signs for China State Construction International Holdings (of which 1 is 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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