Investors Could Be Concerned With Beijing Enterprises Water Group's (HKG:371) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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?

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%.

View 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 report for Beijing Enterprises Water Group.

What Does the ROCE Trend For Beijing Enterprises Water Group Tell Us?

When we looked at the ROCE trend at Beijing Enterprises Water Group, we didn't gain much confidence. Around five years ago the returns on capital were 8.2%, 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Beijing Enterprises Water Group is reinvesting in the business, but returns have been falling. Since the stock has declined 52% over the last five years, investors may not be too optimistic on this trend improving either. 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.

If you want to know some of the risks facing Beijing Enterprises Water Group we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.