Some Investors May Be Worried About Kangda International Environmental's (HKG:6136) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kangda International Environmental:

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

0.055 = CN¥752m ÷ (CN¥19b - CN¥5.6b) (Based on the trailing twelve months to June 2024).

Therefore, Kangda International Environmental has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Water Utilities industry average of 6.9%.

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're interested in investigating Kangda International Environmental's past further, check out this free graph covering Kangda International Environmental's past earnings, revenue and cash flow.

So How Is Kangda International Environmental's ROCE Trending?

When we looked at the ROCE trend at Kangda International Environmental, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.5% from 7.7% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Kangda International Environmental's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 60% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Kangda International Environmental does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

While Kangda International Environmental isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.