China Guangguang Environmental Group’s (HKG:257) return on capital does not reflect well on its business.

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If you’re looking for a multibagger, there are a few things to keep in mind. Typically, you want to focus on growth trends. return Increase in capital employed (ROCE) and expand accordingly base of capital employed. Simply put, this type of business is a compound interest machine, meaning you are continually reinvesting your earnings at an ever-higher rate of return. Taking this into consideration, I found that China Light Environment Group (HKG:257) and its ROCE trend, we weren’t too excited.

About Return on Capital Employed (ROCE)

For those who aren’t sure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. Analysts use the following formula to calculate China Guangguang Environmental Group.

Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)

0.074 = HK$11 billion ÷ (HK$189 billion – HK$41 billion) (Based on the previous 12 months to June 2023).

therefore, China Guangguang Environmental Group’s ROCE is 7.4%. Although the absolute profit is low, it is around 8.2%, which is the average for the commercial services industry.

Check out our latest analysis for China Light Environment Group.

SEHK:257 Return on Capital Employed (10 November 2023)

Above you can see how China Guangguang Environmental Group’s current ROCE compares to its previous return on capital, but history can only tell us so much. If you’re interested, take a look at our analyst forecasts. free A report on analyst forecasts for a company.

ROCE trends

On the surface, the ROCE trend in China Everbright Environmental Group does not inspire confidence. About five years ago, the return on equity was 11%, but since then it has fallen to 7.4%. This is a bit concerning given that the business is deploying more capital while its revenue is declining. This could mean that the company is losing competitive advantage or market share. This is because while more money is being invested in ventures, the actual profits generated are lower, which in itself is “less return on expenditure.”

What we can learn from China Optical Environment Group’s ROCE

We are a little concerned about China Guangguang Environmental Group. This is because even though more capital is being put into the business, both the profits and sales generated from that capital are decreasing. It’s no surprise that the share price has fallen 49% over the past five years, and investors seem to have recognized these changes. There are fundamental trends in these areas that aren’t great, so consider looking elsewhere.

To learn more about China Everbright Environment Group, please visit: Two warning signs, One of them is a concern.

If you want to find solid companies with high earnings, check this out. free List of companies with good balance sheets and good return on equity.

Valuation is complex, but we help make it simple.

Check out our comprehensive analysis of whether China Guangguang Environmental Group is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.

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