What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating China Boqi Environmental (Holding) (HKG:2377), we don’t think it’s current trends fit the mold of a multi-bagger.
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. To calculate this metric for China Boqi Environmental (Holding), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.072 = CN¥164m ÷ (CN¥4.0b – CN¥1.7b) (Based on the trailing twelve months to December 2019).
So, China Boqi Environmental (Holding) has an ROCE of 7.2%. Ultimately, that’s a low return and it under-performs the Commercial Services industry average of 11%.
Check out our latest analysis for China Boqi Environmental (Holding)
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of China Boqi Environmental (Holding), check out these free graphs here.
How Are Returns Trending?
In terms of China Boqi Environmental (Holding)’s historical ROCE movements, the trend isn’t fantastic. Around five years ago the returns on capital were 12%, but since then they’ve fallen to 7.2%. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
Another thing to note, China Boqi Environmental (Holding) has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.The Key Takeaway
In summary, China Boqi Environmental (Holding) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Since the stock has gained an impressive 79% over the last year, investors must think there’s better things to come. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
If you want to know some of the risks facing China Boqi Environmental (Holding) we’ve found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
While China Boqi Environmental (Holding) 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. 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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