The Returns At Chongqing Sanfeng Environment Group (SHSE:601827) Aren't Growing

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Chongqing Sanfeng Environment Group (SHSE:601827), it didn't seem to tick all of these boxes.

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 Chongqing Sanfeng Environment Group, this is the formula:

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

0.079 = CN¥1.5b ÷ (CN¥25b - CN¥5.8b) (Based on the trailing twelve months to June 2024).

Thus, Chongqing Sanfeng Environment Group has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.6% generated by the Renewable Energy industry, it's much better.

Check out 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, you can check out the forecasts from the analysts covering Chongqing Sanfeng Environment Group for free.

The Trend Of ROCE

The returns on capital haven't changed much for Chongqing Sanfeng Environment Group in recent years. The company has employed 112% more capital in the last five years, and the returns on that capital have remained stable at 7.9%. 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.

What We Can Learn From 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. And investors appear hesitant that the trends will pick up because the stock has fallen 18% in the last three years. Therefore based on the analysis done in this article, we don't think Chongqing Sanfeng Environment Group has the makings of a multi-bagger.

Like most companies, Chongqing Sanfeng Environment Group does come with some risks, and we've found 2 warning signs that you should be aware of.

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.