Returns On Capital At Chengdu Xingrong Environment (SZSE:000598) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Chengdu Xingrong Environment (SZSE:000598), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Chengdu Xingrong Environment:

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

0.068 = CN¥2.5b ÷ (CN¥46b - CN¥8.9b) (Based on the trailing twelve months to March 2024).

Thus, Chengdu Xingrong Environment has an ROCE of 6.8%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 5.4%.

See our latest analysis for Chengdu Xingrong Environment

Above you can see how the current ROCE for Chengdu Xingrong Environment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chengdu Xingrong Environment .

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Chengdu Xingrong Environment in recent years. The company has employed 141% more capital in the last five years, and the returns on that capital have remained stable at 6.8%. 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.

What We Can Learn From Chengdu Xingrong Environment's ROCE

As we've seen above, Chengdu Xingrong Environment's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 85% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 2 warning signs for Chengdu Xingrong Environment (1 makes us a bit uncomfortable) you should be aware of.

While Chengdu Xingrong Environment 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.