Investors Could Be Concerned With China Resources and EnvironmentLtd's (SHSE:600217) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 briefly looking over the numbers, we don't think China Resources and EnvironmentLtd (SHSE:600217) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 China Resources and EnvironmentLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.033 = CN¥143m ÷ (CN¥8.3b - CN¥4.1b) (Based on the trailing twelve months to September 2024).

Therefore, China Resources and EnvironmentLtd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.3%.

See our latest analysis for China Resources and EnvironmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Resources and EnvironmentLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Resources and EnvironmentLtd.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because China Resources and EnvironmentLtd's ROCE has reduced by 84% over the last five years, while the business employed 64% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. China Resources and EnvironmentLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Another thing to note, China Resources and EnvironmentLtd has a high ratio of current liabilities to total assets of 49%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for China Resources and EnvironmentLtd. In light of this, the stock has only gained 15% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about China Resources and EnvironmentLtd, we've spotted 5 warning signs, and 2 of them are a bit unpleasant.

While China Resources and EnvironmentLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.