Here's What To Make Of China Water Affairs Group's (HKG:855) Decelerating Rates Of Return

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at China Water Affairs Group's (HKG:855) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

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 China Water Affairs Group is:

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

0.11 = HK$3.5b ÷ (HK$47b - HK$15b) (Based on the trailing twelve months to March 2021).

Therefore, 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 7.3% it's much better.

View our latest analysis for China Water Affairs Group

In the above chart we have measured China Water Affairs Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Water Affairs Group here for free.

What Can We Tell From China Water Affairs Group's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 125% more capital into its operations. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From 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 the stock has followed suit returning a meaningful 47% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to know some of the risks facing China Water Affairs Group we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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This article by Simply Wall St is general in nature. 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.
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