China Energy Development Holdings (HKG:228) Might Have The Makings Of A Multi-Bagger

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in China Energy Development Holdings' (HKG:228) returns on capital, so let's have a look.

What is 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. The formula for this calculation on China Energy Development Holdings is:

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

0.054 = HK$117m ÷ (HK$2.7b - HK$573m) (Based on the trailing twelve months to June 2021).

Thus, China Energy Development Holdings has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 8.2%.

See our latest analysis for China Energy Development Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Energy Development Holdings' ROCE against it's prior returns. 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.

The Trend Of ROCE

Shareholders will be relieved that China Energy Development Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 5.4% on its capital. While returns have increased, the amount of capital employed by China Energy Development Holdings has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

The Bottom Line On China Energy Development Holdings' ROCE

To sum it up, China Energy Development Holdings is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 60% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if China Energy Development Holdings can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with China Energy Development Holdings (including 1 which is concerning) .

While China Energy Development 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.

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.

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