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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Grandblue Environment (SHSE:600323) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Grandblue Environment, this is the formula:

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

0.087 = CN¥2.2b ÷ (CN¥36b - CN¥11b) (Based on the trailing twelve months to September 2023).

Thus, Grandblue Environment has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 7.1%.

View our latest analysis for Grandblue Environment

In the above chart we have measured Grandblue Environment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grandblue Environment.

What Does the ROCE Trend For Grandblue Environment Tell Us?

The returns on capital haven't changed much for Grandblue Environment in recent years. Over the past five years, ROCE has remained relatively flat at around 8.7% and the business has deployed 112% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Grandblue Environment's ROCE

Long story short, while Grandblue Environment has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Grandblue Environment, we've spotted 2 warning signs, and 1 of them is concerning.

While Grandblue Environment may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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