Be Wary Of Beijing Enterprises Water Group (HKG:371) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. Although, when we looked at Beijing Enterprises Water Group (HKG:371), it didn't seem to tick all of these boxes.

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. To calculate this metric for Beijing Enterprises Water Group, this is the formula:

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

0.051 = HK$6.8b ÷ (HK$190b - HK$55b) (Based on the trailing twelve months to June 2022).

Thus, Beijing Enterprises Water Group has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 6.5%.

See our latest analysis for Beijing Enterprises Water Group

In the above chart we have measured Beijing Enterprises Water Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Beijing Enterprises Water Group here for free.

What Can We Tell From Beijing Enterprises Water Group's ROCE Trend?

In terms of Beijing Enterprises Water Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.1%, but since then they've fallen to 5.1%. 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.

In Conclusion...

To conclude, we've found that Beijing Enterprises Water Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 67% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Beijing Enterprises Water Group has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Beijing Enterprises Water Group (of which 1 can't be ignored!) that you should know about.

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.