There Are Reasons To Feel Uneasy About TIL Enviro's (HKG:1790) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at TIL Enviro (HKG:1790), it didn't seem to tick all of these boxes.

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. The formula for this calculation on TIL Enviro is:

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

0.082 = HK$170m ÷ (HK$2.5b - HK$382m) (Based on the trailing twelve months to June 2022).

Therefore, TIL Enviro has an ROCE of 8.2%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

See 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 want to delve into the historical earnings, revenue and cash flow of TIL Enviro, check out these free graphs here.

The Trend Of ROCE

In terms of TIL Enviro's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.2% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, TIL Enviro has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From TIL Enviro's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for TIL Enviro have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 23% return over the last three years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, TIL Enviro does come with some risks, and we've found 4 warning signs that you should be aware of.

While TIL Enviro 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.