Kimou Environmental Holding (HKG:6805) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Kimou Environmental Holding (HKG:6805) so let's look a bit deeper.

What is 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 Kimou Environmental Holding is:

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

0.084 = CN¥176m ÷ (CN¥3.0b - CN¥894m) (Based on the trailing twelve months to December 2020).

So, Kimou Environmental Holding has an ROCE of 8.4%. On its own, that's a low figure but it's around the 9.3% average generated by the Commercial Services industry.

Check out our latest analysis for Kimou Environmental Holding

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'd like to look at how Kimou Environmental Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kimou Environmental Holding's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last four years to 8.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 226%. So we're very much inspired by what we're seeing at Kimou Environmental Holding thanks to its ability to profitably reinvest capital.

One more thing to note, Kimou Environmental Holding has decreased current liabilities to 30% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Kimou Environmental Holding has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

To sum it up, Kimou Environmental Holding has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 58% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Kimou Environmental Holding can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Kimou Environmental Holding that you might find interesting.

While Kimou Environmental Holding 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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