China Oilfield Services (HKG:2883) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 China Oilfield Services (HKG:2883) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Oilfield Services:

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

0.041 = CN¥2.4b ÷ (CN¥77b - CN¥18b) (Based on the trailing twelve months to September 2021).

So, China Oilfield Services has an ROCE of 4.1%. Even though it's in line with the industry average of 4.1%, it's still a low return by itself.

Check out our latest analysis for China Oilfield Services

In the above chart we have measured China Oilfield Services' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Shareholders will be relieved that China Oilfield Services has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.1%, which is always encouraging. While returns have increased, the amount of capital employed by China Oilfield Services has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Bottom Line On China Oilfield Services' ROCE

In summary, we're delighted to see that China Oilfield Services has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 2.0% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

China Oilfield Services does have some risks though, and we've spotted 3 warning signs for China Oilfield Services that you might be interested in.

While China Oilfield Services 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.