If you’re looking for a multi-bagger, there’s a few things to keep an eye out 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in China Water Affairs Group’s (HKG:855) returns on capital, so let’s have a look.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China Water Affairs Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = HK$3.0b ÷ (HK$42b – HK$12b) (Based on the trailing twelve months to March 2020).
So, China Water Affairs Group has an ROCE of 10%. In absolute terms, that’s a satisfactory return, but compared to the Water Utilities industry average of 7.4% it’s much better.
Above you can see how the current ROCE for China Water Affairs Group compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Investors would be pleased with what’s happening at China Water Affairs Group. The data shows that returns on capital have increased substantially over the last five years to 10%. The amount of capital employed has increased too, by 198%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
The Key Takeaway
All in all, it’s terrific to see that China Water Affairs Group is reaping the rewards from prior investments and is growing its capital base. And with a respectable 86% awarded to those who held the stock over the last five years, you could argue that these trends 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.
China Water Affairs Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn’t sit too well with us…
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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