Will The ROCE Trend At Beijing Enterprises Environment Group (HKG:154) Continue?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Beijing Enterprises Environment Group's (HKG:154) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Beijing Enterprises Environment Group is:

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

0.059 = HK$382m ÷ (HK$8.8b - HK$2.3b) (Based on the trailing twelve months to June 2020).

Therefore, Beijing Enterprises Environment Group has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.9%.

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

How Are Returns Trending?

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 5.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 124%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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. The current liabilities has increased to 26% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

In summary, it's great to see that Beijing Enterprises Environment Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 61% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Beijing Enterprises Environment Group, we've spotted 4 warning signs, and 1 of them is a bit unpleasant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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