Some Investors May Be Worried About Zheneng Jinjiang Environment Holding's (SGX:BWM) Returns On Capital

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. Although, when we looked at Zheneng Jinjiang Environment Holding (SGX:BWM), it didn't seem to tick all of these boxes.

Understanding 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. 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)

0.061 = CN¥836m ÷ (CN¥21b - CN¥7.2b) (Based on the trailing twelve months to June 2022).

So, Zheneng Jinjiang Environment Holding has an ROCE of 6.1%. On its own, that's a low figure but it's around the 7.0% average generated by the Renewable Energy industry.

Check out the opportunities and risks within the XX Renewable Energy industry.

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're interested in investigating Zheneng Jinjiang Environment Holding's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Zheneng Jinjiang Environment Holding's ROCE Trending?

On the surface, the trend of ROCE at Zheneng Jinjiang Environment Holding doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.1% from 12% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Zheneng Jinjiang Environment Holding is reinvesting for growth and has higher sales as a result. But since the stock has dived 75% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One more thing: We've identified 4 warning signs with Zheneng Jinjiang Environment Holding (at least 3 which are a bit concerning) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.