Kunming Dianchi Water Treatment (HKG:3768) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Kunming Dianchi Water Treatment (HKG:3768) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Kunming Dianchi Water Treatment is:

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

0.11 = CN¥793m ÷ (CN¥12b - CN¥4.2b) (Based on the trailing twelve months to December 2022).

Thus, Kunming Dianchi Water Treatment has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Water Utilities industry.

Check out our latest analysis for Kunming Dianchi Water Treatment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kunming Dianchi Water Treatment's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kunming Dianchi Water Treatment, check out these free graphs here.

How Are Returns Trending?

Kunming Dianchi Water Treatment is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. So we're very much inspired by what we're seeing at Kunming Dianchi Water Treatment thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 36% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kunming Dianchi Water Treatment has. And since the stock has fallen 44% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Kunming Dianchi Water Treatment does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Kunming Dianchi Water Treatment 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.