Investors Met With Slowing Returns on Capital At China Everbright Environment Group (HKG:257)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at China Everbright Environment Group (HKG:257) 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?

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. The formula for this calculation on China Everbright Environment Group is:

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

0.09 = HK$13b ÷ (HK$185b - HK$35b) (Based on the trailing twelve months to June 2021).

Thus, China Everbright Environment Group has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.5%.

View our latest analysis for China Everbright Environment Group

In the above chart we have measured China Everbright Environment Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Everbright Environment Group.

So How Is China Everbright Environment Group's ROCE Trending?

In terms of China Everbright Environment Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.0% for the last five years, and the capital employed within the business has risen 301% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In conclusion, China Everbright Environment Group has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for China Everbright Environment Group (of which 1 is concerning!) that you should know about.

While China Everbright Environment 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.

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.

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