Will Weigang Environmental Technology Holding Group (HKG:1845) Multiply In Value Going Forward?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Weigang Environmental Technology Holding Group (HKG:1845) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Weigang Environmental Technology Holding Group:

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

0.097 = CN¥58m ÷ (CN¥845m - CN¥253m) (Based on the trailing twelve months to June 2020).

Thus, Weigang Environmental Technology Holding Group has an ROCE of 9.7%. Even though it's in line with the industry average of 9.9%, it's still a low return by itself.

Check out our latest analysis for Weigang Environmental Technology Holding Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Weigang Environmental Technology Holding Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Weigang Environmental Technology Holding Group, check out these free graphs here.

What Does the ROCE Trend For Weigang Environmental Technology Holding Group Tell Us?

On the surface, the trend of ROCE at Weigang Environmental Technology Holding Group doesn't inspire confidence. Around four years ago the returns on capital were 46%, but since then they've fallen to 9.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Weigang Environmental Technology Holding Group has decreased its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Weigang Environmental Technology Holding Group's ROCE

While returns have fallen for Weigang Environmental Technology Holding Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 38% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 4 warning signs with Weigang Environmental Technology Holding Group (at least 1 which can't be ignored) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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