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? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at China Environmental Technology and Bioenergy Holdings (HKG:1237) 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. To calculate this metric for China Environmental Technology and Bioenergy Holdings, this is the formula:

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%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 5.1%.

View 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.

So How Is China Environmental Technology and Bioenergy Holdings' ROCE Trending?

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. In regards to capital employed, China Environmental Technology and Bioenergy Holdings is using 28% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. China Environmental Technology and Bioenergy Holdings could be selling under-performing assets since the ROCE is improving.

On a related note, the company's ratio of current liabilities to total assets has decreased to 9.1%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

In the end, China Environmental Technology and Bioenergy Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

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.