Dynagreen Environmental Protection Group (HKG:1330) Has Some Way To Go To Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Dynagreen Environmental Protection Group (HKG:1330) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Dynagreen Environmental Protection Group:

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

0.088 = CN¥1.1b ÷ (CN¥17b - CN¥4.7b) (Based on the trailing twelve months to December 2020).

Thus, Dynagreen Environmental Protection Group has an ROCE of 8.8%. Even though it's in line with the industry average of 9.3%, it's still a low return by itself.

See our latest analysis for Dynagreen Environmental Protection Group

In the above chart we have measured Dynagreen Environmental Protection Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

The returns on capital haven't changed much for Dynagreen Environmental Protection Group in recent years. The company has consistently earned 8.8% for the last five years, and the capital employed within the business has risen 191% in that time. 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.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 27% of total assets, this reported ROCE would probably be less than8.8% because total capital employed would be higher.The 8.8% ROCE could be even lower if current liabilities weren't 27% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From Dynagreen Environmental Protection Group's ROCE

Long story short, while Dynagreen Environmental Protection Group has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 9.2% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Dynagreen Environmental Protection Group, we've spotted 3 warning signs, and 1 of them is significant.

While Dynagreen Environmental Protection 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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