Shaanxi Provincial Natural GasLtd's (SZSE:002267) Returns Have Hit A Wall

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 Shaanxi Provincial Natural GasLtd (SZSE:002267) 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)?

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 Shaanxi Provincial Natural GasLtd, this is the formula:

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

0.092 = CN¥865m ÷ (CN¥13b - CN¥3.5b) (Based on the trailing twelve months to June 2024).

So, Shaanxi Provincial Natural GasLtd has an ROCE of 9.2%. Even though it's in line with the industry average of 9.0%, it's still a low return by itself.

View our latest analysis for Shaanxi Provincial Natural GasLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shaanxi Provincial Natural GasLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shaanxi Provincial Natural GasLtd.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Shaanxi Provincial Natural GasLtd. The company has consistently earned 9.2% for the last five years, and the capital employed within the business has risen 38% in that time. 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.

On a side note, Shaanxi Provincial Natural GasLtd has done well to reduce current liabilities to 27% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Shaanxi Provincial Natural GasLtd's ROCE

In summary, Shaanxi Provincial Natural GasLtd has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 19% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Shaanxi Provincial Natural GasLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Shaanxi Provincial Natural GasLtd 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.