Returns On Capital At SIIC Environment Holdings (SGX:BHK) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at SIIC Environment Holdings (SGX:BHK) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for SIIC Environment Holdings:

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

0.064 = CN¥1.7b ÷ (CN¥35b - CN¥8.9b) (Based on the trailing twelve months to December 2020).

Thus, SIIC Environment Holdings has an ROCE of 6.4%. On its own, that's a low figure but it's around the 7.1% average generated by the Water Utilities industry.

Check out our latest analysis for SIIC Environment Holdings

In the above chart we have measured SIIC Environment Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From SIIC Environment Holdings' ROCE Trend?

There are better returns on capital out there than what we're seeing at SIIC Environment Holdings. The company has consistently earned 6.4% for the last five years, and the capital employed within the business has risen 181% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From SIIC Environment Holdings' ROCE

In conclusion, SIIC Environment Holdings has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

SIIC Environment Holdings does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While SIIC Environment Holdings 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. 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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