Zheneng Jinjiang Environment Holding (SGX:BWM) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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. To calculate this metric for Zheneng Jinjiang Environment Holding, this is the formula:

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

0.064 = CN¥909m ÷ (CN¥21b - CN¥7.2b) (Based on the trailing twelve months to December 2022).

Thus, Zheneng Jinjiang Environment Holding has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 7.4%.

Check out 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.

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

When we looked at the ROCE trend at Zheneng Jinjiang Environment Holding, we didn't gain much confidence. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 6.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Zheneng Jinjiang Environment Holding's ROCE

Bringing it all together, while we're somewhat encouraged by Zheneng Jinjiang Environment Holding's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 40% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 3 warning signs with Zheneng Jinjiang Environment Holding and understanding these should be part of your investment process.

While Zheneng Jinjiang Environment Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.