If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Horizon Construction Development (HKG:9930), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Horizon Construction Development is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = CN¥2.0b ÷ (CN¥31b - CN¥9.3b) (Based on the trailing twelve months to December 2023).
Therefore, Horizon Construction Development has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 6.3% generated by the Trade Distributors industry, it's much better.
See our latest analysis for Horizon Construction Development
In the above chart we have measured Horizon Construction Development's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Horizon Construction Development .
So How Is Horizon Construction Development's ROCE Trending?
In terms of Horizon Construction Development's historical ROCE trend, it doesn't exactly demand attention. Over the past three years, ROCE has remained relatively flat at around 9.1% and the business has deployed 101% 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.
Our Take On Horizon Construction Development's ROCE
As we've seen above, Horizon Construction Development's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last year. Therefore based on the analysis done in this article, we don't think Horizon Construction Development has the makings of a multi-bagger.
One more thing, we've spotted 1 warning sign facing Horizon Construction Development that you might find interesting.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com