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There Are Reasons To Feel Uneasy About Capital Environment Holdings' (HKG:3989) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Capital Environment Holdings (HKG:3989) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for Capital Environment Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = CN¥1.5b ÷ (CN¥25b - CN¥8.3b) (Based on the trailing twelve months to June 2021).
So, Capital Environment Holdings has an ROCE of 9.3%. Even though it's in line with the industry average of 8.5%, it's still a low return by itself.
See our latest analysis for Capital Environment Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Capital Environment Holdings' ROCE against it's prior returns. If you'd like to look at how Capital Environment Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We weren't thrilled with the trend because Capital Environment Holdings' ROCE has reduced by 44% over the last five years, while the business employed 458% more capital. That being said, Capital Environment Holdings raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Capital Environment Holdings' earnings and if they change as a result from the capital raise.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 9.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
What We Can Learn From Capital Environment Holdings' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Capital Environment Holdings is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 35% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Capital Environment Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...
While Capital Environment Holdings 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.
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About SEHK:3989
Capital Environment Holdings
An investment holding company, engages in the waste treatment and waste-to-energy businesses in the People’s Republic of China.
Low and slightly overvalued.