Some Investors May Be Worried About Chongqing Water GroupLtd's (SHSE:601158) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Chongqing Water GroupLtd (SHSE:601158), it didn't seem to tick all of these boxes.

What Is 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 Chongqing Water GroupLtd is:

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

0.0095 = CN¥245m ÷ (CN¥34b - CN¥8.0b) (Based on the trailing twelve months to September 2024).

Thus, Chongqing Water GroupLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 6.2%.

See our latest analysis for Chongqing Water GroupLtd

In the above chart we have measured Chongqing Water GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chongqing Water GroupLtd .

What Does the ROCE Trend For Chongqing Water GroupLtd Tell Us?

On the surface, the trend of ROCE at Chongqing Water GroupLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 9.4% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Chongqing Water GroupLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 12% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Chongqing Water GroupLtd, we've spotted 4 warning signs, and 2 of them make us uncomfortable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.