Be Wary Of Henan BCCY Environmental Energy (SZSE:300614) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Henan BCCY Environmental Energy (SZSE:300614) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Henan BCCY Environmental Energy is:

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

0.013 = CN¥26m ÷ (CN¥2.3b - CN¥332m) (Based on the trailing twelve months to September 2023).

Therefore, Henan BCCY Environmental Energy has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.9%.

View our latest analysis for Henan BCCY Environmental Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan BCCY Environmental Energy's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Henan BCCY Environmental Energy.

The Trend Of ROCE

On the surface, the trend of ROCE at Henan BCCY Environmental Energy doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Henan BCCY Environmental Energy have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last year have experienced a 62% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Henan BCCY Environmental Energy does have some risks, we noticed 4 warning signs (and 1 which is significant) we think you should know about.

While Henan BCCY Environmental Energy 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.