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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at China Everbright Water (SGX:U9E), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for China Everbright Water:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = HK$2.2b ÷ (HK$34b - HK$7.9b) (Based on the trailing twelve months to December 2023).
Thus, China Everbright Water has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 6.7%.
View our latest analysis for China Everbright Water
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Everbright Water's ROCE against it's prior returns. If you're interested in investigating China Everbright Water's past further, check out this free graph covering China Everbright Water's past earnings, revenue and cash flow.
How Are Returns Trending?
The returns on capital haven't changed much for China Everbright Water in recent years. Over the past five years, ROCE has remained relatively flat at around 8.3% and the business has deployed 70% more capital into its operations. 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.
Our Take On China Everbright Water's ROCE
In conclusion, China Everbright Water has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd 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 is significant.