Beijing Enterprises Water Group's (HKG:371) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Beijing Enterprises Water Group (HKG:371), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.057 = HK$7.6b ÷ (HK$184b - HK$50b) (Based on the trailing twelve months to December 2021).

Therefore, Beijing Enterprises Water Group has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 8.1%.

See 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, you can check out the forecasts from the analysts covering Beijing Enterprises Water Group here for free.

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. Over the last five years, returns on capital have decreased to 5.7% from 8.2% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Beijing Enterprises Water Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 2 warning signs with Beijing Enterprises Water Group (at least 1 which can't be ignored) , and understanding them would certainly be useful.

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.