Asia Cement (China) Holdings’ (HKG:743) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we’ve noticed some promising trends at Asia Cement (China) Holdings (HKG:743) so let’s look a bit deeper.

What Is 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. To calculate this metric for Asia Cement (China) Holdings, this is the formula:

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

0.093 = CN¥1.7b ÷ (CN¥22b – CN¥3.3b) (Based on the trailing twelve months to June 2022).

Therefore, Asia Cement (China) Holdings has an ROCE of 9.3%. In absolute terms, that’s a low return but it’s around the Basic Materials industry average of 8.0%.

View our latest analysis for Asia Cement (China) Holdings

In the above chart we have measured Asia Cement (China) Holdings’ prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 50% more capital is being employed now too. So we’re very much inspired by what we’re seeing at Asia Cement (China) Holdings thanks to its ability to profitably reinvest capital.

The Bottom Line On Asia Cement (China) Holdings’ ROCE

In summary, it’s great to see that Asia Cement (China) Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 87% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Asia Cement (China) Holdings does come with some risks, and we’ve found 2 warning signs that you should be aware of.

While Asia Cement (China) Holdings may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.