Kimou Environmental Holding (HKG:6805) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Kimou Environmental Holding's (HKG:6805) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.084 = CN¥254m ÷ (CN¥4.4b - CN¥1.4b) (Based on the trailing twelve months to December 2022).

Thus, Kimou Environmental Holding has an ROCE of 8.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

See 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're interested in investigating Kimou Environmental Holding's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five 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 158%. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 31%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.

What We Can Learn From Kimou Environmental Holding's ROCE

All in all, it's terrific to see that Kimou Environmental Holding is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 73% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 2 warning signs for Kimou Environmental Holding (1 doesn't sit too well with us) you should be aware of.

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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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.