The Trends At Dongjiang Environmental (HKG:895) That You Should Know About

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Dongjiang Environmental (HKG:895) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on Dongjiang Environmental is:

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

0.078 = CN¥515m ÷ (CN¥10b - CN¥3.7b) (Based on the trailing twelve months to September 2020).

Thus, Dongjiang Environmental has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 9.7%.

Check out our latest analysis for Dongjiang Environmental

Above you can see how the current ROCE for Dongjiang Environmental compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Dongjiang Environmental's ROCE Trending?

When we looked at the ROCE trend at Dongjiang Environmental, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Dongjiang Environmental 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Dongjiang Environmental's ROCE

In summary, Dongjiang Environmental is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 39% in the last five years. Therefore based on the analysis done in this article, we don't think Dongjiang Environmental has the makings of a multi-bagger.

On a separate note, we've found 2 warning signs for Dongjiang Environmental you'll probably want to 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. 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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