China Water Affairs Group's (HKG:855) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over China Water Affairs Group's (HKG:855) trend of ROCE, we liked what we saw.

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. To calculate this metric for China Water Affairs Group, this is the formula:

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

0.11 = HK$3.9b ÷ (HK$52b - HK$16b) (Based on the trailing twelve months to September 2021).

Thus, China Water Affairs Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 8.1% it's much better.

View our latest analysis for China Water Affairs Group

Above you can see how the current ROCE for China Water Affairs Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Water Affairs Group.

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. The company has employed 134% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On China Water Affairs Group's ROCE

The main thing to remember is that China Water Affairs Group has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 128% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about China Water Affairs Group, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

While China Water Affairs Group 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.