Returns On Capital At China Carbon Neutral Development Group (HKG:1372) Have Hit The Brakes

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating China Carbon Neutral Development Group (HKG:1372), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for China Carbon Neutral Development Group:

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

0.13 = HK$46m ÷ (HK$543m - HK$181m) (Based on the trailing twelve months to June 2022).

Therefore, China Carbon Neutral Development Group has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 4.2% it's much better.

See our latest analysis for China Carbon Neutral Development Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Carbon Neutral Development Group's ROCE against it's prior returns. If you'd like to look at how China Carbon Neutral Development Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, China Carbon Neutral Development Group's ROCE has remained relatively flat while the business is using 73% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. So if this trend continues, don't be surprised if the business is smaller in a few years time.

On a side note, China Carbon Neutral Development Group has done well to reduce current liabilities to 33% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

Overall, we're not ecstatic to see China Carbon Neutral Development Group reducing the amount of capital it employs in the business. Since the stock has declined 45% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for China Carbon Neutral Development Group that we think you should be aware of.

While China Carbon Neutral Development Group 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.