Stock Analysis

China Energy Development Holdings (HKG:228) Is Experiencing Growth In Returns On Capital

SEHK:228
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So on that note, China Energy Development Holdings (HKG:228) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for China Energy Development Holdings, this is the formula:

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

0.067 = HK$151m ÷ (HK$2.9b - HK$594m) (Based on the trailing twelve months to December 2021).

Thus, China Energy Development Holdings has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 9.1%.

Check out our latest analysis for China Energy Development Holdings

roce
SEHK:228 Return on Capital Employed July 21st 2022

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'd like to look at how China Energy Development Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China Energy Development Holdings Tell Us?

We're delighted to see that China Energy Development Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, China Energy Development Holdings is utilizing 21% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On China Energy Development Holdings' ROCE

In summary, it's great to see that China Energy Development Holdings has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

While China Energy Development Holdings 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.