Be Wary Of China Boqi Environmental (Holding) (HKG:2377) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 China Boqi Environmental (Holding) (HKG:2377) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for China Boqi Environmental (Holding):

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

0.075 = CN¥191m ÷ (CN¥3.9b - CN¥1.3b) (Based on the trailing twelve months to December 2020).

So, China Boqi Environmental (Holding) has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 9.3%.

View our latest analysis for China Boqi Environmental (Holding)

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

How Are Returns Trending?

In terms of China Boqi Environmental (Holding)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.5% from 15% 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, China Boqi Environmental (Holding) has done well to pay down its current liabilities to 34% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for China Boqi Environmental (Holding) have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing China Boqi Environmental (Holding), we've discovered 1 warning sign that you should be aware of.

While China Boqi Environmental (Holding) 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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