The Returns On Capital At CGN Mining (HKG:1164) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.048 = HK$177m ÷ (HK$7.1b - HK$3.4b) (Based on the trailing twelve months to June 2022).

Thus, CGN Mining has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 8.9%.

Check out our latest analysis for CGN Mining

In the above chart we have measured CGN Mining's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CGN Mining here for free.

What Can We Tell From CGN Mining's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 16% five years ago, while capital employed has grown 112%. Usually this isn't ideal, but given CGN Mining conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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 48% 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.

What We Can Learn From 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. And the stock has done incredibly well with a 101% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know about the risks facing CGN Mining, we've discovered 1 warning sign that you should be aware of.

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. 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.