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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Everbright Water (SGX:U9E), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on China Everbright Water is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = HK$2.0b ÷ (HK$34b - HK$9.7b) (Based on the trailing twelve months to June 2023).
Thus, China Everbright Water has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 7.0%.
View our latest analysis for China Everbright Water
Above you can see how the current ROCE for China Everbright Water compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Everbright Water.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at China Everbright Water. The company has employed 57% more capital in the last five years, and the returns on that capital have remained stable at 8.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From China Everbright Water's ROCE
Long story short, while China Everbright Water has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you'd like to know more about China Everbright Water, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.