China Environmental Technology and Bioenergy Holdings (HKG:1237) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 China Environmental Technology and Bioenergy Holdings (HKG:1237) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on China Environmental Technology and Bioenergy Holdings is:

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

0.023 = CN¥20m ÷ (CN¥972m - CN¥89m) (Based on the trailing twelve months to June 2022).

So, China Environmental Technology and Bioenergy Holdings has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Leisure industry average of 4.0%.

See our latest analysis for China Environmental Technology and Bioenergy Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating China Environmental Technology and Bioenergy Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Environmental Technology and Bioenergy Holdings' ROCE Trend?

Like most people, we're pleased that China Environmental Technology and Bioenergy Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 2.3% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 28% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 9.1%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that China Environmental Technology and Bioenergy Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

In summary, it's great to see that China Environmental Technology and Bioenergy Holdings has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 96% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we found 2 warning signs for China Environmental Technology and Bioenergy Holdings (1 is a bit concerning) you should be aware of.

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.