If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 China Boqi Environmental (Holding) (HKG:2377) and its trend of ROCE, we really liked what we saw.
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 Boqi Environmental (Holding) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = CN¥239m ÷ (CN¥5.1b - CN¥1.7b) (Based on the trailing twelve months to June 2024).
Thus, China Boqi Environmental (Holding) has an ROCE of 7.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.
View our latest analysis for China Boqi Environmental (Holding)
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Boqi Environmental (Holding)'s ROCE against it's prior returns. If you're interested in investigating China Boqi Environmental (Holding)'s past further, check out this free graph covering China Boqi Environmental (Holding)'s past earnings, revenue and cash flow.
How Are Returns Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.0%. The amount of capital employed has increased too, by 54%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In Conclusion...
In summary, it's great to see that China Boqi Environmental (Holding) can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 21% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, China Boqi Environmental (Holding) does come with some risks, and we've found 1 warning sign that you should be aware of.
While China Boqi Environmental (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.