Returns Are Gaining Momentum At Beijing Enterprises Urban Resources Group (HKG:3718)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Beijing Enterprises Urban Resources Group's (HKG:3718) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Beijing Enterprises Urban Resources Group, this is the formula:

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

0.13 = HK$750m ÷ (HK$7.8b - HK$1.9b) (Based on the trailing twelve months to June 2021).

Therefore, Beijing Enterprises Urban Resources Group has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 8.8% it's much better.

View our latest analysis for Beijing Enterprises Urban Resources Group

In the above chart we have measured Beijing Enterprises Urban Resources 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 Beijing Enterprises Urban Resources Group.

So How Is Beijing Enterprises Urban Resources Group's ROCE Trending?

We like the trends that we're seeing from Beijing Enterprises Urban Resources Group. Over the last four years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 335%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Beijing Enterprises Urban Resources Group has decreased current liabilities to 25% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Beijing Enterprises Urban Resources Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

To sum it up, Beijing Enterprises Urban Resources Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 49% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 2 warning signs with Beijing Enterprises Urban Resources Group (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Beijing Enterprises Urban Resources 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.