We Like These Underlying Trends At China Water Affairs Group (HKG:855)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in China Water Affairs Group's (HKG:855) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for China Water Affairs Group:

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

0.10 = HK$3.2b ÷ (HK$45b - HK$13b) (Based on the trailing twelve months to September 2020).

Thus, China Water Affairs Group has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Water Utilities industry.

Check out 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, 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 trends we've noticed at China Water Affairs Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 170%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From China Water Affairs Group's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China Water Affairs Group has. And a remarkable 125% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if China Water Affairs Group can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for China Water Affairs Group (1 is a bit concerning) you should be aware of.

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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