Returns On Capital At Fujian Haixia Environmental Protection GroupLtd (SHSE:603817) Have Stalled

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Fujian Haixia Environmental Protection GroupLtd (SHSE:603817), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Fujian Haixia Environmental Protection GroupLtd, this is the formula:

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

0.052 = CN¥247m ÷ (CN¥6.6b - CN¥1.9b) (Based on the trailing twelve months to June 2024).

Thus, Fujian Haixia Environmental Protection GroupLtd has an ROCE of 5.2%. On its own, that's a low figure but it's around the 5.6% average generated by the Commercial Services industry.

View our latest analysis for Fujian Haixia Environmental Protection GroupLtd

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'd like to look at how Fujian Haixia Environmental Protection GroupLtd has performed in the past in other metrics, you can view this free graph of Fujian Haixia Environmental Protection GroupLtd's past earnings, revenue and cash flow.

So How Is Fujian Haixia Environmental Protection GroupLtd's ROCE Trending?

The returns on capital haven't changed much for Fujian Haixia Environmental Protection GroupLtd in recent years. Over the past five years, ROCE has remained relatively flat at around 5.2% and the business has deployed 55% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 29% of total assets, this reported ROCE would probably be less than5.2% because total capital employed would be higher.The 5.2% ROCE could be even lower if current liabilities weren't 29% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

Our Take On Fujian Haixia Environmental Protection GroupLtd's ROCE

In conclusion, Fujian Haixia Environmental Protection GroupLtd has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 20% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Fujian Haixia Environmental Protection GroupLtd has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with Fujian Haixia Environmental Protection GroupLtd (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Fujian Haixia Environmental Protection GroupLtd 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. 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.