Returns On Capital At Canvest Environmental Protection Group (HKG:1381) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Canvest Environmental Protection Group (HKG:1381) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Canvest Environmental Protection Group is:

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

0.086 = HK$1.4b ÷ (HK$19b - HK$2.3b) (Based on the trailing twelve months to December 2020).

Therefore, Canvest Environmental Protection Group has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 7.0% generated by the Renewable Energy industry, it's much better.

See our latest analysis for Canvest Environmental Protection Group

Above you can see how the current ROCE for Canvest Environmental Protection Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Canvest Environmental Protection Group.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Canvest Environmental Protection Group. Over the past five years, ROCE has remained relatively flat at around 8.6% and the business has deployed 351% more capital into its operations. 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.

The Bottom Line On Canvest Environmental Protection Group's ROCE

Long story short, while Canvest Environmental Protection Group has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 21% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing: We've identified 3 warning signs with Canvest Environmental Protection Group (at least 2 which are potentially serious) , and understanding them would certainly be useful.

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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