Returns At China Everbright Greentech (HKG:1257) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at China Everbright Greentech (HKG:1257) so let's look a bit deeper.

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 Everbright Greentech, this is the formula:

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

0.093 = HK$2.7b ÷ (HK$35b - HK$6.3b) (Based on the trailing twelve months to December 2020).

Therefore, China Everbright Greentech has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 7.2% generated by the Renewable Energy industry, it's much better.

Check out our latest analysis for China Everbright Greentech

Above you can see how the current ROCE for China Everbright Greentech compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Everbright Greentech here for free.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 503% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

In summary, it's great to see that China Everbright Greentech can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 61% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

China Everbright Greentech does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

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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