Should We Be Excited About The Trends Of Returns At CGN Mining (HKG:1164)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at CGN Mining (HKG:1164) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.054 = HK$143m ÷ (HK$3.9b - HK$1.3b) (Based on the trailing twelve months to June 2020).

Therefore, CGN Mining has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 6.8%.

View 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're interested in investigating CGN Mining's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of CGN Mining's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From CGN Mining's ROCE

Bringing it all together, while we're somewhat encouraged by CGN Mining's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 51% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

CGN Mining does have some risks, we noticed 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

While CGN Mining may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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