Beijing Enterprises Water Group (HKG:371) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Beijing Enterprises Water Group (HKG:371), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.054 = HK$7.3b ÷ (HK$183b - HK$48b) (Based on the trailing twelve months to June 2021).

Thus, Beijing Enterprises Water Group has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 7.5%.

View our latest analysis for Beijing Enterprises Water Group

Above you can see how the current ROCE for Beijing Enterprises Water Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Beijing Enterprises Water Group.

How Are Returns Trending?

In terms of Beijing Enterprises Water Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.2% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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...

In summary, Beijing Enterprises Water Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 26% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Beijing Enterprises Water Group does have some risks though, and we've spotted 1 warning sign for Beijing Enterprises Water Group that you might be interested in.

While Beijing Enterprises Water Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.