What Do The Returns At Canvest Environmental Protection Group (HKG:1381) Mean Going Forward?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So on that note, Canvest Environmental Protection Group (HKG:1381) looks quite promising in regards to its trends of return on capital.

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)

0.099 = HK$1.2b ÷ (HK$15b - HK$2.4b) (Based on the trailing twelve months to June 2020).

Therefore, Canvest Environmental Protection Group has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 7.5% 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, you can check out the forecasts from the analysts covering Canvest Environmental Protection Group here for free.

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.9%. The amount of capital employed has increased too, by 253%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

In summary, it's great to see that Canvest Environmental Protection Group 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. Considering the stock has delivered 17% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Canvest Environmental Protection Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

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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