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Some Investors May Be Worried About Zheneng Jinjiang Environment Holding's (SGX:BWM) Returns On Capital

Simply Wall St
·3 min read

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Zheneng Jinjiang Environment Holding (SGX:BWM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Zheneng Jinjiang Environment Holding, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.065 = CN¥890m ÷ (CN¥21b - CN¥7.2b) (Based on the trailing twelve months to September 2022).

So, Zheneng Jinjiang Environment Holding has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 7.0%.

Check out our latest analysis for Zheneng Jinjiang Environment Holding

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roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zheneng Jinjiang Environment Holding's ROCE against it's prior returns. If you'd like to look at how Zheneng Jinjiang Environment Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Zheneng Jinjiang Environment Holding doesn't inspire confidence. To be more specific, ROCE has fallen from 8.3% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 35%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Zheneng Jinjiang Environment Holding's ROCE

While returns have fallen for Zheneng Jinjiang Environment Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 60% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 3 warning signs with Zheneng Jinjiang Environment Holding (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.

While Zheneng Jinjiang Environment 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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