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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Pan Asia Environmental Protection Group's (HKG:556) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Pan Asia Environmental Protection Group:
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).
Thus, 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 7.0%.
Check out our latest analysis for Pan Asia Environmental Protection Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Pan Asia Environmental Protection Group's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Pan Asia Environmental Protection Group.
What The Trend Of ROCE Can Tell Us
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 now earns 1.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Pan Asia Environmental Protection Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
In Conclusion...
To bring it all together, Pan Asia Environmental Protection Group has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 35% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Pan Asia Environmental Protection Group does have some risks, we noticed 2 warning signs (and 1 which is 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.