The Return Trends At Chiho Environmental Group (HKG:976) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 when we looked at Chiho Environmental Group (HKG:976) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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. 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%. On its own, that's a low figure but it's around the 9.0% average generated by the Commercial Services industry.

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 want to delve into the historical earnings, revenue and cash flow of Chiho Environmental Group, check out these free graphs here.

How Are Returns Trending?

The fact that Chiho Environmental Group is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 7.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Chiho Environmental Group is utilizing 21% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 50% of its operations, which isn't ideal. 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.

The Key Takeaway

Long story short, we're delighted to see that Chiho Environmental Group's reinvestment activities have paid off and the company is now profitable. Although the company may be facing some issues elsewhere since the stock has plunged 83% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Chiho Environmental Group does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.