China Shuifa Singyes Energy Holdings' (HKG:750) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at China Shuifa Singyes Energy Holdings (HKG:750), it didn't seem to tick all of these boxes.

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. The formula for this calculation on China Shuifa Singyes Energy Holdings is:

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

0.067 = CN¥629m ÷ (CN¥16b - CN¥7.0b) (Based on the trailing twelve months to June 2022).

Therefore, China Shuifa Singyes Energy Holdings has an ROCE of 6.7%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

See our latest analysis for China Shuifa Singyes Energy Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Shuifa Singyes Energy Holdings' ROCE against it's prior returns. If you're interested in investigating China Shuifa Singyes Energy Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is China Shuifa Singyes Energy Holdings' ROCE Trending?

Over the past five years, China Shuifa Singyes Energy Holdings' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect China Shuifa Singyes Energy Holdings to be a multi-bagger going forward.

On a side note, China Shuifa Singyes Energy Holdings' current liabilities are still rather high at 43% 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.

Our Take On China Shuifa Singyes Energy Holdings' ROCE

We can conclude that in regards to China Shuifa Singyes Energy Holdings' returns on capital employed and the trends, there isn't much change to report on. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 74% over the last five years. 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.

China Shuifa Singyes Energy Holdings does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.