These Trends Paint A Bright Future For Churchill China (LON:CHH)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Churchill China's (LON:CHH) look very promising so lets take a look.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Churchill China, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = UK£11m ÷ (UK£61m - UK£12m) (Based on the trailing twelve months to December 2019).
Thus, Churchill China has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
See our latest analysis for Churchill China
Historical performance is a great place to start when researching a stock so above you can see the gauge for Churchill China's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Churchill China, check out these free graphs here.
So How Is Churchill China's ROCE Trending?
Churchill China is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 42%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From Churchill China's ROCE
In summary, it's great to see that Churchill China 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 investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 94% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know more about Churchill China, we've spotted 2 warning signs, and 1 of them is significant.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
This article by Simply Wall St is general in nature. 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.
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