Zheneng Jinjiang Environment Holding (SGX:BWM) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Zheneng Jinjiang Environment Holding (SGX:BWM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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)

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

Therefore, Zheneng Jinjiang Environment Holding has an ROCE of 6.4%. On its own, that's a low figure but it's around the 7.2% average generated by the Renewable Energy industry.

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zheneng Jinjiang Environment Holding doesn't inspire 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 may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Zheneng Jinjiang Environment Holding is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Zheneng Jinjiang Environment Holding does have some risks though, and we've spotted 3 warning signs for Zheneng Jinjiang Environment Holding that you might be interested in.

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. 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.