There Are Reasons To Feel Uneasy About China Everbright Environment Group's (HKG:257) Returns On Capital

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

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. 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)

0.076 = HK$12b ÷ (HK$200b - HK$40b) (Based on the trailing twelve months to June 2022).

Therefore, China Everbright Environment Group has an ROCE of 7.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

Our analysis indicates that 257 is potentially undervalued!

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 movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line On China Everbright Environment Group's ROCE

In summary, we're somewhat concerned by China Everbright Environment Group's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 57% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about China Everbright Environment Group, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While China Everbright Environment Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.