Investors Will Want Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' (HKG:1938) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Chu Kong Petroleum and Natural Gas Steel Pipe Holdings (HKG:1938) so let's look a bit deeper.

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 Chu Kong Petroleum and Natural Gas Steel Pipe Holdings, this is the formula:

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

0.03 = CN¥87m ÷ (CN¥6.6b - CN¥3.6b) (Based on the trailing twelve months to December 2022).

So, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 6.4%.

View 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 want to delve into the historical earnings, revenue and cash flow of Chu Kong Petroleum and Natural Gas Steel Pipe Holdings, check out these free graphs here.

How Are Returns Trending?

We're delighted to see that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 23% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

On a side note, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' current liabilities are still rather high at 55% 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.

The Key Takeaway

From what we've seen above, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 75% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing: We've identified 4 warning signs with Chu Kong Petroleum and Natural Gas Steel Pipe Holdings (at least 1 which is potentially serious) , and understanding them would certainly be useful.

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.