What Should Investors Know About China Boqi Environmental (Holding) Co Ltd’s (HKG:2377) Capital Returns?

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in China Boqi Environmental (Holding) Co Ltd (HKG:2377).

Buying China Boqi Environmental (Holding) makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to 2377’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand China Boqi Environmental (Holding)’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

See our latest analysis for China Boqi Environmental (Holding)

China Boqi Environmental (Holding)’s Return On Capital Employed

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine China Boqi Environmental (Holding)’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). Take a look at the formula box beneath:

ROCE Calculation for 2377

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = CN¥318m ÷ (CN¥3.2b – CN¥1.1b) = 15%

The calculation above shows that 2377’s earnings were 15% of capital employed. Comparing this to a healthy 15% benchmark shows China Boqi Environmental (Holding) is currently able to return a robust amount to owners for the use of their capital, which is a good sign for those who believe this will continue and the company’s management will find good uses for the earnings they create.

SEHK:2377 Last Perf November 8th 18
SEHK:2377 Last Perf November 8th 18

Does this mean I should invest?

2377 is efficient with the use of capital, but this is only the case if 2377 continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that 2377’s ROCE has risen from 14%, indicating the company’s capital returns have stengthened. We can see that earnings have increased from CN¥130m to CN¥318m whilst the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

Next Steps

2377’s investors have enjoyed an upward trend in ROCE and it is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability. If you don’t pay attention to these factors you cannot be sure if this trend will continue or reverse due to reasons that cannot be seen by looking in the past. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 2377 or other alternatives.

  1. Future Outlook: What are well-informed industry analysts predicting for 2377’s future growth? Take a look at our free research report of analyst consensus for 2377’s outlook.
  2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for China Boqi Environmental (Holding)’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.