Returns On Capital Are Showing Encouraging Signs At China Environmental Technology and Bioenergy Holdings (HKG:1237)

What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

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Understanding 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. 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)

0.0018 = CN¥1.8m ÷ (CN¥1.3b - CN¥254m) (Based on the trailing twelve months to June 2025).

Therefore, China Environmental Technology and Bioenergy Holdings has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Leisure industry average of 9.4%.

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 covering China Environmental Technology and Bioenergy Holdings' past earnings, revenue and cash flow.

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

We're delighted to see that China Environmental Technology and Bioenergy Holdings is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.2% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 20% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On China Environmental Technology and Bioenergy Holdings' ROCE

In summary, we're delighted to see that China Environmental Technology and Bioenergy Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 68% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about China Environmental Technology and Bioenergy Holdings, we've spotted 2 warning signs, and 1 of them is a bit concerning.

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.