Returns At China Environmental Technology and Bioenergy Holdings (HKG:1237) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in China Environmental Technology and Bioenergy Holdings' (HKG:1237) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.031 = CN¥27m ÷ (CN¥989m - CN¥107m) (Based on the trailing twelve months to December 2021).

Thus, China Environmental Technology and Bioenergy Holdings has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Leisure industry average of 4.0%.

Check out our latest analysis for China Environmental Technology and Bioenergy Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Environmental Technology and Bioenergy Holdings' ROCE against it's prior returns. 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.

The Trend Of ROCE

It's great to see that China Environmental Technology and Bioenergy Holdings has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 27%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a related note, the company's ratio of current liabilities to total assets has decreased to 11%, which basically reduces it's funding from the likes of short-term creditors or suppliers. 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 On China Environmental Technology and Bioenergy Holdings' ROCE

In a nutshell, we're pleased to see that China Environmental Technology and Bioenergy Holdings has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 84% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing, we've spotted 3 warning signs facing China Environmental Technology and Bioenergy Holdings that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.