Here's What To Make Of TIL Enviro's (HKG:1790) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating TIL Enviro (HKG:1790), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for TIL Enviro, this is the formula:

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

0.089 = HK$168m ÷ (HK$2.2b - HK$304m) (Based on the trailing twelve months to June 2020).

So, TIL Enviro has an ROCE of 8.9%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 9.9%.

View our latest analysis for TIL Enviro

Historical performance is a great place to start when researching a stock so above you can see the gauge for TIL Enviro's ROCE against it's prior returns. If you're interested in investigating TIL Enviro's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is TIL Enviro's ROCE Trending?

In terms of TIL Enviro's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last four years. However it looks like TIL Enviro might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, TIL Enviro has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On TIL Enviro's ROCE

In summary, TIL Enviro is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 25% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 3 warning signs with TIL Enviro (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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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This article by Simply Wall St is general in nature. 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.
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