Returns On Capital - An Important Metric For China Oilfield Services (HKG:2883)

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, China Oilfield Services (HKG:2883) looks quite promising in regards to its trends of return on capital.

What is 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. The formula for this calculation on China Oilfield Services is:

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

0.075 = CN¥4.7b ÷ (CN¥77b - CN¥15b) (Based on the trailing twelve months to September 2020).

Therefore, China Oilfield Services has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 11%.

Check out our latest analysis for China Oilfield Services

Above you can see how the current ROCE for China Oilfield Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Oilfield Services.

What The Trend Of ROCE Can Tell Us

China Oilfield Services has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 40% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On China Oilfield Services' ROCE

To bring it all together, China Oilfield Services has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 75% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing China Oilfield Services we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

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. 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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