Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Pan Asia Environmental Protection Group (HKG:556) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Pan Asia Environmental Protection Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = CN¥14m ÷ (CN¥1.3b - CN¥128m) (Based on the trailing twelve months to June 2024).
Therefore, Pan Asia Environmental Protection Group has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 7.2%.
View our latest analysis for Pan Asia Environmental Protection Group
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're interested in investigating Pan Asia Environmental Protection Group's past further, check out this free graph covering Pan Asia Environmental Protection Group's past earnings, revenue and cash flow.
The Trend Of ROCE
We're delighted to see that Pan Asia Environmental Protection Group is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.2%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
What We Can Learn From Pan Asia Environmental Protection Group's ROCE
To bring it all together, Pan Asia Environmental Protection Group has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 38% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
Pan Asia Environmental Protection Group does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.
While Pan Asia Environmental Protection Group 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.