What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at China Boqi Environmental (Holding) (HKG:2377), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Boqi Environmental (Holding):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = CN¥229m ÷ (CN¥5.0b - CN¥1.8b) (Based on the trailing twelve months to December 2023).
So, China Boqi Environmental (Holding) has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.2%.
View our latest analysis for China Boqi Environmental (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'd like to look at how China Boqi Environmental (Holding) has performed in the past in other metrics, you can view this free graph of China Boqi Environmental (Holding)'s past earnings, revenue and cash flow.
What Does the ROCE Trend For China Boqi Environmental (Holding) Tell Us?
In terms of China Boqi Environmental (Holding)'s historical ROCE trend, it doesn't exactly demand attention. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 7.1%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
As we've seen above, China Boqi Environmental (Holding)'s returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 36% in the last five years. Therefore based on the analysis done in this article, we don't think China Boqi Environmental (Holding) has the makings of a multi-bagger.
China Boqi Environmental (Holding) does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com