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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Hunan Junxin Environmental Protection (SZSE:301109) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hunan Junxin Environmental Protection:

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

0.089 = CN¥781m ÷ (CN¥9.6b - CN¥848m) (Based on the trailing twelve months to September 2023).

Therefore, Hunan Junxin Environmental Protection has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Commercial Services industry average of 5.6%.

Check out our latest analysis for Hunan Junxin Environmental Protection

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Hunan Junxin Environmental Protection, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Hunan Junxin Environmental Protection's ROCE has reduced by 27% over the last four years, while the business employed 126% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hunan Junxin Environmental Protection's earnings and if they change as a result from the capital raise. Additionally, we found that Hunan Junxin Environmental Protection's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a side note, Hunan Junxin Environmental Protection has done well to pay down its current liabilities to 8.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that Hunan Junxin Environmental Protection is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 13% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Hunan Junxin Environmental Protection, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Hunan Junxin Environmental Protection isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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