There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Chu Kong Petroleum and Natural Gas Steel Pipe Holdings (HKG:1938) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Chu Kong Petroleum and Natural Gas Steel Pipe Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = CN¥23m ÷ (CN¥6.5b - CN¥4.4b) (Based on the trailing twelve months to June 2024).
So, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 13%.
View our latest analysis for Chu Kong Petroleum and Natural Gas Steel Pipe Holdings
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'd like to look at how Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has performed in the past in other metrics, you can view this free graph of Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Like most people, we're pleased that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.1% on their capital employed. In regards to capital employed, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings is using 56% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 67% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
In a nutshell, we're pleased to see that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has been able to generate higher returns from less capital. Given the stock has declined 50% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
Chu Kong Petroleum and Natural Gas Steel Pipe Holdings does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.