Beijing Enterprises Environment Group (HKG:154) Might Have The Makings Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Beijing Enterprises Environment Group (HKG:154) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Beijing Enterprises Environment Group, this is the formula:

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

0.077 = HK$454m ÷ (HK$11b - HK$5.1b) (Based on the trailing twelve months to December 2021).

So, Beijing Enterprises Environment Group has an ROCE of 7.7%. Even though it's in line with the industry average of 8.0%, it's still a low return by itself.

View our latest analysis for Beijing Enterprises Environment Group

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

What The Trend Of ROCE Can Tell Us

Beijing Enterprises Environment Group has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 521% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 46% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Beijing Enterprises Environment Group's ROCE

In summary, we're delighted to see that Beijing Enterprises Environment Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 55% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Beijing Enterprises Environment Group does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Beijing Enterprises Environment Group 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.