Be Wary Of Zheneng Jinjiang Environment Holding (SGX:BWM) And Its Returns On Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Zheneng Jinjiang Environment Holding (SGX:BWM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Zheneng Jinjiang Environment Holding:

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

0.047 = CN¥661m ÷ (CN¥19b - CN¥5.3b) (Based on the trailing twelve months to June 2021).

Thus, Zheneng Jinjiang Environment Holding has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.0%.

View our latest analysis for Zheneng Jinjiang Environment Holding

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'd like to look at how Zheneng Jinjiang Environment Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Zheneng Jinjiang Environment Holding Tell Us?

On the surface, the trend of ROCE at Zheneng Jinjiang Environment Holding doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Zheneng Jinjiang Environment Holding's ROCE

In summary, we're somewhat concerned by Zheneng Jinjiang Environment Holding's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 30% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Zheneng Jinjiang Environment Holding does have some risks though, and we've spotted 2 warning signs for Zheneng Jinjiang Environment Holding that you might be interested in.

While Zheneng Jinjiang Environment Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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