Investors Could Be Concerned With Sinopec Oilfield Equipment's (SZSE:000852) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Sinopec Oilfield Equipment (SZSE:000852) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Sinopec Oilfield Equipment:

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

0.045 = CN¥148m ÷ (CN¥9.8b - CN¥6.5b) (Based on the trailing twelve months to March 2024).

So, Sinopec Oilfield Equipment has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.5%.

Check out our latest analysis for Sinopec Oilfield Equipment

In the above chart we have measured Sinopec Oilfield Equipment's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sinopec Oilfield Equipment .

What Does the ROCE Trend For Sinopec Oilfield Equipment Tell Us?

On the surface, the trend of ROCE at Sinopec Oilfield Equipment doesn't inspire confidence. Around five years ago the returns on capital were 5.7%, but since then they've fallen to 4.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Sinopec Oilfield Equipment has decreased its current liabilities to 66% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Sinopec Oilfield Equipment's ROCE

To conclude, we've found that Sinopec Oilfield Equipment is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 2 warning signs with Sinopec Oilfield Equipment (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While Sinopec Oilfield Equipment 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.

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