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

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Weigang Environmental Technology Holding Group (HKG:1845) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Weigang Environmental Technology Holding Group, this is the formula:

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).

So, 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.

See 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're interested in investigating Weigang Environmental Technology Holding Group's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Weigang Environmental Technology Holding Group's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 46%, but since then they've fallen to 9.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Weigang Environmental Technology Holding Group has done well to pay down its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Weigang Environmental Technology Holding Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Weigang Environmental Technology Holding Group is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 27% 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.

If you want to know some of the risks facing Weigang Environmental Technology Holding Group we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Weigang Environmental Technology Holding 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. 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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