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

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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. The formula for this calculation on Beijing Enterprises Water Group is:

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

0.047 = CN¥5.7b ÷ (CN¥165b - CN¥42b) (Based on the trailing twelve months to December 2023).

Therefore, Beijing Enterprises Water Group has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 6.2%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Beijing Enterprises Water Group .

So How Is Beijing Enterprises Water Group's ROCE Trending?

On the surface, the trend of ROCE at Beijing Enterprises Water Group doesn't inspire confidence. To be more specific, ROCE has fallen from 8.2% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Beijing Enterprises Water Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Beijing Enterprises Water Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 16% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Beijing Enterprises Water Group does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.