The Return Trends At China Energy Development Holdings (HKG:228) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, China Energy Development Holdings (HKG:228) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for China Energy Development Holdings:

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

0.0028 = HK$6.0m ÷ (HK$2.8b - HK$665m) (Based on the trailing twelve months to December 2020).

So, China Energy Development Holdings has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.1%.

View our latest analysis for China Energy Development 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 China Energy Development Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

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

Shareholders will be relieved that China Energy Development Holdings has broken into profitability. The company now earns 0.3% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On China Energy Development Holdings' ROCE

As discussed above, China Energy Development Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has only returned 12% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you'd like to know more about China Energy Development Holdings, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

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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