# Datang Environment Industry Group Co Ltd (HKG:1272): The Return Story

This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Datang Environment Industry Group Co Ltd (HKG:1272)’s return fundamentals and stock market performance.

Purchasing Datang Environment Industry Group gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to 1272’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Datang Environment Industry Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

### What is Return on Capital Employed (ROCE)?

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Datang Environment Industry Group’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). 1272’s ROCE is calculated below:

ROCE Calculation for 1272

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = CN¥1.08b ÷ (CN¥18.23b – CN¥8.45b) = 11.07%

As you can see, 1272 earned HK\$11.1 from every HK\$100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which 1272 has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.

### What is causing this?

The underperforming ROCE is not ideal for Datang Environment Industry Group investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, 1272’s ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of 1272’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that 1272 weakened investor return on capital employed from 13.52%. We can see that earnings have actually increased from CN¥595.73m to CN¥1.08b but capital employed has grown by a proportionally greater amount because of a rise in total assets , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.

### Next Steps

1272’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 1272 or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for 1272’s future growth? Take a look at our free research report of analyst consensus for 1272’s outlook.
2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Datang Environment Industry Group’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.