Yahoo Finance Investors Met With Slowing Returns on Capital At Churchill China (LON:CHH)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Churchill China (LON:CHH) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
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 Churchill China is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = UK£11m ÷ (UK£75m - UK£12m) (Based on the trailing twelve months to June 2023).
Thus, Churchill China has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Consumer Durables industry.
See our latest analysis for Churchill China
Above you can see how the current ROCE for Churchill China compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Churchill China for free.
How Are Returns Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 56% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that Churchill China has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
What We Can Learn From Churchill China's ROCE
The main thing to remember is that Churchill China has proven its ability to continually reinvest at respectable rates of return. Yet over the last five years the stock has declined 24%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
On a final note, we found 3 warning signs for Churchill China (1 is concerning) you should be aware of.
While Churchill China 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.
