Here's What's Concerning About China Everbright Greentech's (HKG:1257) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at China Everbright Greentech (HKG:1257) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for China Everbright Greentech, this is the formula:

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

0.052 = HK$1.6b ÷ (HK$41b - HK$9.5b) (Based on the trailing twelve months to June 2022).

Therefore, China Everbright Greentech has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.6%.

See our latest analysis for China Everbright Greentech

In the above chart we have measured China Everbright Greentech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Everbright Greentech.

How Are Returns Trending?

When we looked at the ROCE trend at China Everbright Greentech, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.2% from 10% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 23%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On China Everbright Greentech's ROCE

We're a bit apprehensive about China Everbright Greentech because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 76% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about China Everbright Greentech, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While China Everbright Greentech 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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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.