There's Been No Shortage Of Growth Recently For Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' (HKG:1938) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.011 = CN¥30m ÷ (CN¥6.9b - CN¥4.1b) (Based on the trailing twelve months to June 2023).

So, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 7.6%.

Check out 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.

The Trend Of ROCE

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. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 46%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' current liabilities are still rather high at 59% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' ROCE

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. Astute investors may have an opportunity here because the stock has declined 59% in the last five years. With that in mind, we believe the promising trends 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 makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Chu Kong Petroleum and Natural Gas Steel Pipe Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.