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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Beijing Energy International Holding (HKG:686) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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 Beijing Energy International Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = CN¥2.2b ÷ (CN¥90b - CN¥28b) (Based on the trailing twelve months to December 2023).
Thus, Beijing Energy International Holding has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.0%.
See our latest analysis for Beijing Energy International Holding
Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Energy International Holding's ROCE against it's prior returns. If you'd like to look at how Beijing Energy International Holding has performed in the past in other metrics, you can view this free graph of Beijing Energy International Holding's past earnings, revenue and cash flow.
How Are Returns Trending?
On the surface, the trend of ROCE at Beijing Energy International Holding doesn't inspire confidence. Around five years ago the returns on capital were 4.8%, but since then they've fallen to 3.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Beijing Energy International Holding's ROCE
While returns have fallen for Beijing Energy International Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 14% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Beijing Energy International Holding does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are significant...
While Beijing Energy International 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.
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