Capital returns show encouraging signs at China Finance Investment Holdings (HKG:875)


Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. First, we would like to identify a growth come back on capital employed (ROCE) and at the same time, a base capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. So when we looked China Finance Investment Holdings (HKG:875) and its ROCE trend, we really liked what we saw.

Return on capital employed (ROCE): what is it?

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on China Finance Investment Holdings is as follows:

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

0.036 = HK$17 million ÷ (HK$1.3 billion – HK$852 million) (Based on the last twelve months to December 2021).

Thereby, China Finance Investment Holdings posted a ROCE of 3.6%. Ultimately, it’s a poor performer and it underperforms the food industry average by 9.6%.

Check out our latest analysis for China Finance Investment Holdings

SEHK:875 Return on capital employed June 9, 2022

Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to further investigate the past of China Finance Investment Holdings, check out this free chart of past profits, revenue and cash flow.

What can we say about the ROCE trend of China Finance Investment Holdings?

China Finance Investment Holdings has recently achieved profitability, so its past investments appear to be paying off. The shareholders would no doubt rejoice because the company was loss-making five years ago but now generates 3.6% of its capital. On top of that, China Finance Investment Holdings employs 21% more capital than before, which is expected of a company trying to become profitable. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.

For the record though, there was a notable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. In concrete terms, this means that suppliers or short-term creditors now finance 65% of the activity, which is more than five years ago. Given its fairly high ratio, we remind investors that having current liabilities at these levels can lead to certain risks in certain companies.

Our view on the ROCE of China Finance Investment Holdings

In summary, it is good to see that China Finance Investment Holdings has managed to become profitable and continues to reinvest in its business. And since the stock has fallen 13% in the past five years, there could be an opportunity here. With that in mind, we believe the promising trends warrant further investigation of this stock.

Finally we found 2 warning signs for China Finance Investment Holdings which we think you should be aware of.

For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.


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