Investors Met With Slowing Returns on Capital At Kangda International Environmental (HKG:6136)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Kangda International Environmental (HKG:6136), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Kangda International Environmental is:

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

0.066 = CN¥889m ÷ (CN¥19b - CN¥5.5b) (Based on the trailing twelve months to December 2022).

Thus, Kangda International Environmental has an ROCE of 6.6%. On its own, that's a low figure but it's around the 6.5% average generated by the Water Utilities industry.

Check out our latest analysis for Kangda International Environmental

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Kangda International Environmental, check out these free graphs here.

The Trend Of ROCE

In terms of Kangda International Environmental's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.6% for the last five years, and the capital employed within the business has risen 43% 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.

Our Take On Kangda International Environmental's ROCE

As we've seen above, Kangda International Environmental's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 67% in the last five years. Therefore based on the analysis done in this article, we don't think Kangda International Environmental has the makings of a multi-bagger.

If you'd like to know more about Kangda International Environmental, we've spotted 3 warning signs, and 2 of them can't be ignored.

While Kangda International Environmental 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.