What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating China Conch Environment Protection Holdings (HKG:587), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for China Conch Environment Protection Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = CN¥138m ÷ (CN¥9.8b - CN¥2.3b) (Based on the trailing twelve months to December 2024).
Therefore, China Conch Environment Protection Holdings has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 6.6%.
Check out our latest analysis for China Conch Environment Protection Holdings
Above you can see how the current ROCE for China Conch Environment Protection Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. 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
In terms of China Conch Environment Protection Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 28%, but since then they've fallen to 1.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, China Conch Environment Protection Holdings has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On China Conch Environment Protection Holdings' ROCE
We're a bit apprehensive about China Conch Environment Protection Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 94% in the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
China Conch Environment Protection Holdings does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) 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.