Returns Are Gaining Momentum At ELL Environmental Holdings (HKG:1395)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. With that in mind, we've noticed some promising trends at ELL Environmental Holdings (HKG:1395) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on ELL Environmental Holdings is:

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

0.059 = HK$26m ÷ (HK$529m - HK$85m) (Based on the trailing twelve months to December 2021).

Therefore, ELL Environmental Holdings has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 8.1%.

See our latest analysis for ELL Environmental Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for ELL Environmental Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ELL Environmental Holdings, check out these free graphs here.

The Trend Of ROCE

ELL Environmental Holdings has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 294%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 27% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

What We Can Learn From ELL Environmental Holdings' ROCE

In the end, ELL Environmental Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 39% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing ELL Environmental Holdings, we've discovered 2 warning signs that you should be aware of.

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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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.