What Do The Returns On Capital At Zheneng Jinjiang Environment Holding (SGX:BWM) Tell Us?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 investigating Zheneng Jinjiang Environment Holding (SGX:BWM), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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 Zheneng Jinjiang Environment Holding is:

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

0.058 = CN¥632m ÷ (CN¥18b - CN¥6.7b) (Based on the trailing twelve months to June 2020).

So, Zheneng Jinjiang Environment Holding has an ROCE of 5.8%. On its own, that's a low figure but it's around the 7.3% average generated by the Renewable Energy industry.

See our latest analysis for Zheneng Jinjiang Environment Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zheneng Jinjiang Environment Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zheneng Jinjiang Environment Holding, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Zheneng Jinjiang Environment Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

While returns have fallen for Zheneng Jinjiang Environment Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 21% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One final note, you should learn about the 5 warning signs we've spotted with Zheneng Jinjiang Environment Holding (including 2 which are a bit unpleasant) .

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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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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