Some Investors May Be Worried About CGN Mining's (HKG:1164) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 CGN Mining (HKG:1164), it didn't seem to tick all of these boxes.

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

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 CGN Mining, this is the formula:

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

0.039 = HK$114m ÷ (HK$3.7b - HK$742m) (Based on the trailing twelve months to June 2021).

Thus, CGN Mining has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 8.2%.

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

So How Is CGN Mining's ROCE Trending?

On the surface, the trend of ROCE at CGN Mining doesn't inspire confidence. To be more specific, ROCE has fallen from 28% 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. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

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. And the stock has followed suit returning a meaningful 77% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

CGN Mining does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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