Investors Will Want Beijing Enterprises Environment Group's (HKG:154) Growth In ROCE To Persist

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Beijing Enterprises Environment Group (HKG:154) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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

0.049 = HK$485m ÷ (HK$11b - HK$1.3b) (Based on the trailing twelve months to June 2022).

Thus, Beijing Enterprises Environment Group has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.2%.

Check out the opportunities and risks within the HK Commercial Services industry.

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 want to delve into the historical earnings, revenue and cash flow of Beijing Enterprises Environment Group, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 71% more capital is being employed now too. So we're very much inspired by what we're seeing at Beijing Enterprises Environment Group thanks to its ability to profitably reinvest capital.

One more thing to note, Beijing Enterprises Environment Group has decreased current liabilities to 12% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Beijing Enterprises Environment Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

All in all, it's terrific to see that Beijing Enterprises Environment Group is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 70% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Beijing Enterprises Environment Group (of which 1 is a bit unpleasant!) that you should know about.

While Beijing Enterprises Environment 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.