Returns At Kangda International Environmental (HKG:6136) Appear To Be Weighed Down

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Kangda International Environmental (HKG:6136), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.082 = CN¥1.1b ÷ (CN¥18b - CN¥4.6b) (Based on the trailing twelve months to December 2020).

Thus, Kangda International Environmental has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Water Utilities industry average of 7.0%.

See our latest analysis for Kangda International Environmental

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kangda International Environmental's ROCE against it's prior returns. 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

There are better returns on capital out there than what we're seeing at Kangda International Environmental. The company has employed 89% more capital in the last five years, and the returns on that capital have remained stable at 8.2%. 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.

The Bottom Line 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 61% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Kangda International Environmental (of which 1 is significant!) that you should know about.

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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