Return Trends At China Everbright Environment Group (HKG:257) Aren't Appealing

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at China Everbright Environment Group (HKG:257) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Everbright Environment Group:

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

0.091 = HK$12b ÷ (HK$158b - HK$29b) (Based on the trailing twelve months to December 2020).

Therefore, China Everbright Environment Group has an ROCE of 9.1%. Even though it's in line with the industry average of 9.1%, it's still a low return by itself.

View our latest analysis for China Everbright Environment Group

Above you can see how the current ROCE for China Everbright Environment Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Everbright Environment Group.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for China Everbright Environment Group in recent years. The company has consistently earned 9.1% for the last five years, and the capital employed within the business has risen 276% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On China Everbright Environment Group's ROCE

In summary, China Everbright Environment Group has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

On a separate note, we've found 2 warning signs for China Everbright Environment Group you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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