Investors Met With Slowing Returns on Capital At Kimou Environmental Holding (HKG:6805)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Kimou Environmental Holding (HKG:6805), it didn't seem to tick all of these boxes.

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 Kimou Environmental Holding, this is the formula:

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

0.083 = CN¥253m ÷ (CN¥4.7b - CN¥1.7b) (Based on the trailing twelve months to June 2023).

Therefore, Kimou Environmental Holding has an ROCE of 8.3%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

View our latest analysis for Kimou Environmental Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kimou Environmental Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kimou Environmental Holding, check out these free graphs here.

What Does the ROCE Trend For Kimou Environmental Holding Tell Us?

There are better returns on capital out there than what we're seeing at Kimou Environmental Holding. Over the past five years, ROCE has remained relatively flat at around 8.3% and the business has deployed 162% more capital into its operations. 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.

In Conclusion...

In conclusion, Kimou Environmental Holding has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 52% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Kimou Environmental Holding does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should 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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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.