Taizhou Water Group (HKG:1542) Has Some Way To Go To Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Taizhou Water Group (HKG:1542) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. The formula for this calculation on Taizhou Water Group is:

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

0.05 = CN¥154m ÷ (CN¥3.5b - CN¥442m) (Based on the trailing twelve months to December 2020).

So, Taizhou Water Group has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 7.3%.

View our latest analysis for Taizhou Water Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Taizhou Water Group's ROCE against it's prior returns. If you're interested in investigating Taizhou Water Group's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Taizhou Water Group in recent years. Over the past four years, ROCE has remained relatively flat at around 5.0% and the business has deployed 71% 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.

One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 13% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

As we've seen above, Taizhou Water Group's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 18% in the last year. Therefore based on the analysis done in this article, we don't think Taizhou Water Group has the makings of a multi-bagger.

If you'd like to know more about Taizhou Water Group, we've spotted 5 warning signs, and 2 of them 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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This article by Simply Wall St is general in nature. 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.
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