Capital Environment Holdings (HKG:3989) Hasn't Managed To Accelerate Its Returns

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Capital Environment Holdings (HKG:3989) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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 Capital Environment Holdings is:

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

0.082 = CN¥1.5b ÷ (CN¥31b - CN¥12b) (Based on the trailing twelve months to June 2022).

Thus, Capital Environment Holdings has an ROCE of 8.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

View our latest analysis for Capital Environment Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Capital Environment Holdings, check out these free graphs here.

What Can We Tell From Capital Environment Holdings' ROCE Trend?

The returns on capital haven't changed much for Capital Environment Holdings in recent years. The company has consistently earned 8.2% for the last five years, and the capital employed within the business has risen 228% 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.

Another thing to note, Capital Environment Holdings has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Capital Environment Holdings' ROCE

Long story short, while Capital Environment Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 48% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we found 3 warning signs for Capital Environment Holdings (1 is potentially serious) you should be aware of.

While Capital Environment Holdings 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.

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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.