We're Watching These Trends At Dynagreen Environmental Protection Group (HKG:1330)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Dynagreen Environmental Protection Group (HKG:1330) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.091 = CN¥882m ÷ (CN¥15b - CN¥5.4b) (Based on the trailing twelve months to June 2020).

Therefore, Dynagreen Environmental Protection Group has an ROCE of 9.1%. Even though it's in line with the industry average of 9.4%, 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.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Dynagreen Environmental Protection Group in recent years. Over the past five years, ROCE has remained relatively flat at around 9.1% and the business has deployed 139% more capital into its operations. 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.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 36% of total assets, this reported ROCE would probably be less than9.1% because total capital employed would be higher.The 9.1% ROCE could be even lower if current liabilities weren't 36% 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

As we've seen above, Dynagreen Environmental Protection Group's returns on capital haven't increased but it is reinvesting in the business. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Dynagreen Environmental Protection Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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