If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at China Conch Environment Protection Holdings (HKG:587), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on China Conch Environment Protection Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CN¥309m ÷ (CN¥9.7b - CN¥2.9b) (Based on the trailing twelve months to June 2024).
So, China Conch Environment Protection Holdings has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.0%.
See our latest analysis for China Conch Environment Protection Holdings
In the above chart we have measured China Conch Environment Protection Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Conch Environment Protection Holdings .
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at China Conch Environment Protection Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 28% over the last five years. However it looks like China Conch Environment Protection Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
To conclude, we've found that China Conch Environment Protection Holdings is reinvesting in the business, but returns have been falling. Since the stock has declined 61% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
China Conch Environment Protection Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...
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.