Canvest Environmental Protection Group (HKG:1381) Hasn't Managed To Accelerate Its Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Canvest Environmental Protection Group (HKG:1381) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Canvest Environmental Protection Group:

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

0.098 = HK$2.2b ÷ (HK$26b - HK$3.8b) (Based on the trailing twelve months to December 2022).

Thus, Canvest Environmental Protection Group has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 7.2%.

Check out our latest analysis for Canvest Environmental Protection Group

In the above chart we have measured Canvest Environmental Protection Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Canvest Environmental Protection Group here for free.

What Can We Tell From Canvest Environmental Protection Group's ROCE Trend?

There are better returns on capital out there than what we're seeing at Canvest Environmental Protection Group. The company has employed 167% more capital in the last five years, and the returns on that capital have remained stable at 9.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Canvest Environmental Protection Group's ROCE

In conclusion, Canvest Environmental Protection Group has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 0.6% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Canvest Environmental Protection Group (including 1 which is a bit concerning) .

While Canvest Environmental Protection Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.