Investors Met With Slowing Returns on Capital At Grandblue Environment (SHSE:600323)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Grandblue Environment (SHSE:600323) 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Grandblue Environment, this is the formula:

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

0.08 = CN¥2.1b ÷ (CN¥36b - CN¥9.9b) (Based on the trailing twelve months to December 2023).

So, Grandblue Environment has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 6.2%.

See our latest analysis for Grandblue Environment

Above you can see how the current ROCE for Grandblue Environment 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 analyst report for Grandblue Environment .

What Does the ROCE Trend For Grandblue Environment Tell Us?

There are better returns on capital out there than what we're seeing at Grandblue Environment. Over the past five years, ROCE has remained relatively flat at around 8.0% and the business has deployed 103% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Grandblue Environment's ROCE

Long story short, while Grandblue Environment has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 16% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 2 warning signs for Grandblue Environment (1 is a bit concerning) you should be aware of.

While Grandblue Environment 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.