Some investors may be concerned about Cabbeen Fashion’s return on capital (HKG: 2030)

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Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. First, we will want to see a to recover on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. However, after investigation Cabbeen Mode (HKG: 2030), we don’t think the current trends fit the mold of a multi-bagger.

What is Return on Employee Capital (ROCE)?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Cabbeen Fashion is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.16 = CN ¥ 267m ÷ (CN ¥ 2.3b – CN ¥ 605m) (Based on the last twelve months up to June 2021).

Therefore, Cabbeen Fashion has a ROCE of 16%. On its own, that’s a standard return, but it’s far better than the 6.7% generated by the luxury industry.

Check out our latest review for Cabbeen Fashion

SEHK: 2030 Return on capital employed October 22, 2021

Historical performance is a great place to start when looking for a stock. So above you can see the gauge of Cabbeen Fashion’s ROCE compared to its past returns. If you want to look at Cabbeen Fashion’s performance in the past in other metrics, you can check out this free graph of past income, income and cash flow.

How are the returns evolving?

In terms of Cabbeen Fashion’s historic ROCE moves, the trend isn’t fantastic. Over the past five years, return on capital has declined to 16%, down from 33% five years ago. Meanwhile, the company is using more capital, but it hasn’t changed much in terms of sales over the past 12 months, so it might reflect longer-term investments. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.

In addition, Cabbeen Fashion has done well to reduce its liabilities to 27% of total assets. So we could link some of that to the decrease in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Some argue that this reduces the company’s efficiency in generating ROCE since it now finances more of the operations with its own money.

Our opinion on Cabbeen Fashion’s ROCE

To conclude, we have seen that Cabbeen Fashion is reinvesting in the business, but the returns are declining. Yet for long-term shareholders, the stock has offered them an incredible 125% return over the past five years, so the market seems bullish on its future. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is multi-bagging in the future.

On a final note, we found 3 warning signs for Cabbeen Fashion (1 is not doing too well with us) you should be aware of.

While Cabbeen Fashion does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.

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