Taizhou Water Group (HKG:1542) Will Want To Turn Around Its Return Trends

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Taizhou Water Group (HKG:1542), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Taizhou Water Group:

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

0.033 = CN¥144m ÷ (CN¥5.7b - CN¥1.3b) (Based on the trailing twelve months to December 2022).

Therefore, Taizhou Water Group has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 6.6%.

See our latest analysis for Taizhou Water Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 Can We Tell From Taizhou Water Group's ROCE Trend?

On the surface, the trend of ROCE at Taizhou Water Group doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 3.3%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Taizhou Water Group's ROCE

Bringing it all together, while we're somewhat encouraged by Taizhou Water Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 27% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Taizhou Water Group has the makings of a multi-bagger.

One more thing: We've identified 4 warning signs with Taizhou Water Group (at least 1 which is 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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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.