Returns On Capital Signal Tricky Times Ahead For BHCC Holding (HKG:1552)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 briefly looking over the numbers, we don't think BHCC Holding (HKG:1552) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on BHCC Holding is:

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

0.015 = S$2.0m ÷ (S$193m - S$59m) (Based on the trailing twelve months to June 2024).

So, BHCC Holding has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.2%.

Check out our latest analysis for BHCC Holding

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating BHCC Holding's past further, check out this free graph covering BHCC Holding's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at BHCC Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.5% from 5.1% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

In summary, BHCC Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think BHCC Holding has the makings of a multi-bagger.

BHCC Holding does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those can't be ignored...

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.