There Are Reasons To Feel Uneasy About Allied Sustainability and Environmental Consultants Group's (HKG:8320) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think Allied Sustainability and Environmental Consultants Group (HKG:8320) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Allied Sustainability and Environmental Consultants Group:

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

0.007 = HK$545k ÷ (HK$98m - HK$20m) (Based on the trailing twelve months to September 2021).

Therefore, Allied Sustainability and Environmental Consultants Group has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.1%.

See our latest analysis for Allied Sustainability and Environmental Consultants Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Allied Sustainability and Environmental Consultants Group's ROCE against it's prior returns. If you're interested in investigating Allied Sustainability and Environmental Consultants Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Allied Sustainability and Environmental Consultants Group Tell Us?

On the surface, the trend of ROCE at Allied Sustainability and Environmental Consultants Group doesn't inspire confidence. Around five years ago the returns on capital were 45%, but since then they've fallen to 0.7%. However it looks like Allied Sustainability and Environmental Consultants Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Allied Sustainability and Environmental Consultants Group's ROCE

In summary, Allied Sustainability and Environmental Consultants Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 81% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Allied Sustainability and Environmental Consultants Group (of which 1 makes us a bit uncomfortable!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.