Chiho Environmental Group (HKG:976) Is Doing The Right Things To Multiply Its Share Price

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Chiho Environmental Group (HKG:976) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chiho Environmental Group is:

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

0.073 = HK$387m ÷ (HK$11b - HK$5.2b) (Based on the trailing twelve months to June 2021).

Thus, Chiho Environmental Group has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.1%.

View our latest analysis for Chiho Environmental Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chiho Environmental Group's ROCE against it's prior returns. If you'd like to look at how Chiho Environmental Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Chiho Environmental Group's ROCE Trending?

Chiho Environmental Group has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.3% on its capital. In addition to that, Chiho Environmental Group is employing 21% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 50% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

Overall, Chiho Environmental Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. However the stock is down a substantial 86% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One final note, you should learn about the 3 warning signs we've spotted with Chiho Environmental Group (including 1 which doesn't sit too well with us) .

While Chiho Environmental Group 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.