AAG Energy Holdings' (HKG:2686) Returns On Capital Are Heading Higher

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at AAG Energy Holdings (HKG:2686) so let's look a bit deeper.

Understanding 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. To calculate this metric for AAG Energy Holdings, this is the formula:

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

0.13 = CN¥864m ÷ (CN¥7.1b - CN¥563m) (Based on the trailing twelve months to June 2021).

Therefore, AAG Energy Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Oil and Gas industry.

View our latest analysis for AAG Energy Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for AAG Energy Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of AAG Energy Holdings, check out these free graphs here.

What Can We Tell From AAG Energy Holdings' ROCE Trend?

The trends we've noticed at AAG Energy Holdings are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 24%. So we're very much inspired by what we're seeing at AAG Energy Holdings thanks to its ability to profitably reinvest capital.

The Key Takeaway

To sum it up, AAG Energy Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 53% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if AAG Energy Holdings can keep these trends up, it could have a bright future ahead.

If you want to continue researching AAG Energy Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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