Here's What To Make Of Geo-Jade Petroleum's (SHSE:600759) Decelerating Rates Of Return

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Geo-Jade Petroleum (SHSE:600759), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Geo-Jade Petroleum is:

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

0.067 = CN¥786m ÷ (CN¥13b - CN¥1.0b) (Based on the trailing twelve months to March 2024).

Thus, Geo-Jade Petroleum has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 11%.

View our latest analysis for Geo-Jade Petroleum

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 Geo-Jade Petroleum has performed in the past in other metrics, you can view this free graph of Geo-Jade Petroleum's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Geo-Jade Petroleum in recent years. Over the past five years, ROCE has remained relatively flat at around 6.7% and the business has deployed 23% 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 7.9% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

Long story short, while Geo-Jade Petroleum has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 24% in the last five years. Therefore based on the analysis done in this article, we don't think Geo-Jade Petroleum has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with Geo-Jade Petroleum (at least 1 which is significant) , and understanding them would certainly be useful.

While Geo-Jade Petroleum 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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com