Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Capital Environment Holdings (HKG:3989) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Capital Environment Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CN¥868m ÷ (CN¥20b - CN¥3.5b) (Based on the trailing twelve months to December 2023).
Thus, Capital Environment Holdings has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.2%.
See our latest analysis for Capital Environment Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Capital Environment Holdings' ROCE against it's prior returns. If you're interested in investigating Capital Environment Holdings' past further, check out this free graph covering Capital Environment Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Capital Environment Holdings. The company has employed 38% more capital in the last five years, and the returns on that capital have remained stable at 5.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
Long story short, while Capital Environment Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 47% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you want to know some of the risks facing Capital Environment Holdings we've found 3 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.
While Capital Environment Holdings 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.
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