Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' (HKG:1938) Returns On Capital Are Heading Higher

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Chu Kong Petroleum and Natural Gas Steel Pipe Holdings (HKG:1938) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chu Kong Petroleum and Natural Gas Steel Pipe Holdings is:

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

0.028 = CN¥92m ÷ (CN¥7.4b - CN¥4.2b) (Based on the trailing twelve months to June 2022).

Thus, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.8%.

See our latest analysis for Chu Kong Petroleum and Natural Gas Steel Pipe Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Tell Us?

It's great to see that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.8% on their capital employed. In regards to capital employed, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings is using 35% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Chu Kong Petroleum and Natural Gas Steel Pipe Holdings could be selling under-performing assets since the ROCE is improving.

On a side note, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' current liabilities are still rather high at 56% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, it's great to see that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 79% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Chu Kong Petroleum and Natural Gas Steel Pipe Holdings does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) 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.