Returns On Capital At Chongqing Sanfeng Environment Group (SHSE:601827) Have Hit The Brakes

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 investigating Chongqing Sanfeng Environment Group (SHSE:601827), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Chongqing Sanfeng Environment Group is:

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

0.078 = CN¥1.5b ÷ (CN¥25b - CN¥5.9b) (Based on the trailing twelve months to December 2023).

Therefore, Chongqing Sanfeng Environment Group has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 6.0%.

View our latest analysis for Chongqing Sanfeng Environment Group

In the above chart we have measured Chongqing Sanfeng Environment Group'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 Sanfeng Environment Group .

What Can We Tell From Chongqing Sanfeng Environment Group's ROCE Trend?

In terms of Chongqing Sanfeng Environment Group's historical ROCE trend, it doesn't exactly demand attention. The company has employed 134% more capital in the last five years, and the returns on that capital have remained stable at 7.8%. 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 Chongqing Sanfeng Environment Group's ROCE

In conclusion, Chongqing Sanfeng Environment Group has been investing more capital into the business, but returns on that capital haven't increased. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Chongqing Sanfeng Environment Group has the makings of a multi-bagger.

If you want to continue researching Chongqing Sanfeng Environment Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Chongqing Sanfeng Environment Group 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.