We Like These Underlying Return On Capital Trends At China Everbright Water (SGX:U9E)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in China Everbright Water's (SGX:U9E) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for China Everbright Water:

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

0.08 = HK$1.8b ÷ (HK$27b - HK$4.9b) (Based on the trailing twelve months to December 2020).

Thus, China Everbright Water has an ROCE of 8.0%. On its own, that's a low figure but it's around the 7.4% average generated by the Water Utilities industry.

View our latest analysis for China Everbright Water

In the above chart we have measured China Everbright Water's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Everbright Water.

So How Is China Everbright Water's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 100% more capital is being employed now too. So we're very much inspired by what we're seeing at China Everbright Water thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, China Everbright Water has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 57% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 2 warning signs for China Everbright Water (1 is potentially serious) you should be aware of.

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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