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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 briefly looking over the numbers, we don't think China Everbright Water (SGX:U9E) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is 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. To calculate this metric for China Everbright Water, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = HK$2.1b ÷ (HK$35b - HK$6.9b) (Based on the trailing twelve months to June 2024).
Therefore, China Everbright Water has an ROCE of 7.4%. Even though it's in line with the industry average of 7.4%, it's still a low return by itself.
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 analyst report for China Everbright Water .
So How Is China Everbright Water's ROCE Trending?
The returns on capital haven't changed much for China Everbright Water in recent years. The company has consistently earned 7.4% for the last five years, and the capital employed within the business has risen 58% in that time. 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.
The Bottom Line On China Everbright Water's ROCE
As we've seen above, China Everbright Water's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing: We've identified 2 warning signs with China Everbright Water (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.