The Returns On Capital At China Boqi Environmental (Holding) (HKG:2377) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for China Boqi Environmental (Holding), this is the formula:

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

0.071 = CN¥211m ÷ (CN¥4.7b - CN¥1.7b) (Based on the trailing twelve months to December 2022).

So, China Boqi Environmental (Holding) has an ROCE of 7.1%. Even though it's in line with the industry average of 7.5%, it's still a low return by itself.

See 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'd like to look at how China Boqi Environmental (Holding) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

SWOT Analysis for China Boqi Environmental (Holding)

What The Trend Of ROCE Can Tell Us

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 7.1% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On China Boqi Environmental (Holding)'s ROCE

Bringing it all together, while we're somewhat encouraged by China Boqi Environmental (Holding)'s reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 46% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think China Boqi Environmental (Holding) has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing China Boqi Environmental (Holding) that you might find interesting.

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. 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.