Investors Could Be Concerned With Beijing Enterprises Holdings' (HKG:392) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Holdings (HKG:392), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. Analysts use this formula to calculate it for Beijing Enterprises Holdings:

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

0.021 = HK$3.4b ÷ (HK$223b - HK$60b) (Based on the trailing twelve months to December 2021).

Therefore, Beijing Enterprises Holdings has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 9.5%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Beijing Enterprises Holdings Tell Us?

In terms of Beijing Enterprises Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 3.4%, but since then they've fallen to 2.1%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Beijing Enterprises Holdings' ROCE

While returns have fallen for Beijing Enterprises Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 14% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Beijing Enterprises Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Beijing Enterprises Holdings 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.