Zheneng Jinjiang Environment Holding (SGX:BWM) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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 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)

0.062 = CN¥971m ÷ (CN¥22b - CN¥5.7b) (Based on the trailing twelve months to June 2023).

Therefore, Zheneng Jinjiang Environment Holding has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 7.0%.

View 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'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.

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

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 8.2%, but since then they've fallen to 6.2%. However it looks like Zheneng Jinjiang Environment Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

In Conclusion...

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. And in the last five years, the stock has given away 55% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Zheneng Jinjiang Environment Holding has the makings of a multi-bagger.

On a final note, we've found 3 warning signs for Zheneng Jinjiang Environment Holding that we think you should be aware of.

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.