Returns On Capital Signal Tricky Times Ahead For Kangda International Environmental (HKG:6136)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Kangda International Environmental (HKG:6136), 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. To calculate this metric for Kangda International Environmental, this is the formula:

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

0.055 = CN¥750m ÷ (CN¥19b - CN¥5.4b) (Based on the trailing twelve months to June 2023).

Thus, Kangda International Environmental has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 7.3%.

Check out 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'd like to look at how Kangda International Environmental has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Kangda International Environmental's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 5.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Kangda International Environmental's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Kangda International Environmental have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 70% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Kangda International Environmental (including 2 which are a bit unpleasant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.