There Are Reasons To Feel Uneasy About Beijing Enterprises Water Group's (HKG:371) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 briefly looking over the numbers, we don't think Beijing Enterprises Water Group (HKG:371) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

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

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

Check out 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 for free.

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. To be more specific, ROCE has fallen from 8.2% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for Beijing Enterprises Water Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 21% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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

While Beijing Enterprises Water Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.