Returns On Capital At CGN Mining (HKG:1164) Paint A Concerning Picture

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. 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 investigating CGN Mining (HKG:1164), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for CGN Mining, this is the formula:

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

0.018 = HK$46m ÷ (HK$6.3b - HK$3.8b) (Based on the trailing twelve months to December 2021).

Therefore, CGN Mining has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.1%.

Check out 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.

The Trend Of ROCE

We weren't thrilled with the trend because CGN Mining's ROCE has reduced by 92% over the last five years, while the business employed 42% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with CGN Mining's earnings and if they change as a result from the capital raise.

On a side note, CGN Mining's current liabilities have increased over the last five years to 59% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On CGN Mining's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that CGN Mining is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 23% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

CGN Mining does have some risks, we noticed 4 warning signs (and 2 which shouldn'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.