Is China Water Industry Group (HKG:1129) A Future Multi-bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in China Water Industry Group's (HKG:1129) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Water Industry Group:

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

0.093 = HK$255m ÷ (HK$5.1b - HK$2.4b) (Based on the trailing twelve months to June 2020).

Thus, China Water Industry Group has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 7.4% generated by the Water Utilities industry, it's much better.

See our latest analysis for China Water Industry Group

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'd like to look at how China Water Industry Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

China Water Industry Group's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 348% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

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 46% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On China Water Industry Group's ROCE

To sum it up, China Water Industry Group is collecting higher returns from the same amount of capital, and that's impressive. Although the company may be facing some issues elsewhere since the stock has plunged 80% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

China Water Industry Group does have some risks though, and we've spotted 2 warning signs for China Water Industry Group that you might be interested in.

While China Water Industry Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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