Here's What To Make Of Beijing Enterprises Holdings' (HKG:392) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Beijing Enterprises Holdings (HKG:392), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Beijing Enterprises Holdings, this is the formula:

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

0.023 = HK$3.7b ÷ (HK$224b - HK$58b) (Based on the trailing twelve months to June 2022).

So, Beijing Enterprises Holdings has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 8.8%.

See our latest analysis for Beijing Enterprises Holdings

In the above chart we have measured Beijing Enterprises Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Beijing Enterprises Holdings here for free.

How Are Returns Trending?

In terms of Beijing Enterprises Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 2.3% for the last five years, and the capital employed within the business has risen 31% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In conclusion, Beijing Enterprises Holdings has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Beijing Enterprises Holdings does have some risks though, and we've spotted 1 warning sign for Beijing Enterprises Holdings that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.