CGN Mining (HKG:1164) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think CGN Mining (HKG:1164) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 CGN Mining:

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

0.052 = HK$155m ÷ (HK$4.2b - HK$1.2b) (Based on the trailing twelve months to December 2020).

Therefore, CGN Mining has an ROCE of 5.2%. On its own, that's a low figure but it's around the 6.1% average generated by the Oil and Gas industry.

See our latest analysis for CGN Mining

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

What The Trend Of ROCE Can Tell Us

In terms of CGN Mining's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 33% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for CGN Mining. Furthermore the stock has climbed 71% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 3 warning signs with CGN Mining (at least 2 which are concerning) , and understanding these would certainly be useful.

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This article by Simply Wall St is general in nature. 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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