If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at COFCO Capital Holdings (SZSE:002423) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on COFCO Capital Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = CN¥3.1b ÷ (CN¥128b - CN¥42b) (Based on the trailing twelve months to September 2023).
So, COFCO Capital Holdings has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 7.8%.
In the above chart we have measured COFCO Capital Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering COFCO Capital Holdings for free.
What The Trend Of ROCE Can Tell Us
In terms of COFCO Capital Holdings' historical ROCE trend, it doesn't exactly demand attention. Over the past four years, ROCE has remained relatively flat at around 3.6% and the business has deployed 77% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
As we've seen above, COFCO Capital Holdings' returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 27% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think COFCO Capital Holdings has the makings of a multi-bagger.
If you'd like to know about the risks facing COFCO Capital Holdings, we've discovered 1 warning sign that you should be aware of.
While COFCO Capital 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.
