Sinopec Oilfield Equipment (SZSE:000852) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to 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. 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 Sinopec Oilfield Equipment (SZSE:000852), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sinopec Oilfield Equipment is:

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

0.039 = CN¥129m ÷ (CN¥9.9b - CN¥6.6b) (Based on the trailing twelve months to September 2023).

So, Sinopec Oilfield Equipment has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 7.8%.

Check out our latest analysis for Sinopec Oilfield Equipment

Above you can see how the current ROCE for Sinopec Oilfield Equipment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sinopec Oilfield Equipment for free.

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. To be more specific, ROCE has fallen from 5.7% over the last five years. However it looks like Sinopec Oilfield Equipment might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Sinopec Oilfield Equipment's current liabilities are still rather high at 67% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To conclude, we've found that Sinopec Oilfield Equipment is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Sinopec Oilfield Equipment, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Sinopec Oilfield Equipment 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.