Returns At Kimou Environmental Holding (HKG:6805) Are On The Way Up

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Kimou Environmental Holding (HKG:6805) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Kimou Environmental Holding:

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

0.077 = CN¥188m ÷ (CN¥3.3b - CN¥859m) (Based on the trailing twelve months to June 2021).

Therefore, Kimou Environmental Holding has an ROCE of 7.7%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 8.5%.

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

So How Is Kimou Environmental Holding's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last four years, returns on capital employed have risen substantially to 7.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 168% more capital is being employed now too. 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.

One more thing to note, Kimou Environmental Holding has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On 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. Investors may not be impressed by the favorable underlying trends yet because over the last year the stock has only returned 5.9% to shareholders. So with that in mind, we think the stock deserves further research.

Kimou Environmental Holding does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.

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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