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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Anton Oilfield Services Group (HKG:3337) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Anton Oilfield Services Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = CN¥325m ÷ (CN¥7.9b - CN¥3.1b) (Based on the trailing twelve months to December 2020).
Therefore, Anton Oilfield Services Group has an ROCE of 6.8%. On its own, that's a low figure but it's around the 6.4% average generated by the Energy Services industry.
In the above chart we have measured Anton Oilfield Services Group's 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?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 35%. So we're very much inspired by what we're seeing at Anton Oilfield Services Group thanks to its ability to profitably reinvest capital.
The Bottom Line On Anton Oilfield Services Group's ROCE
To sum it up, Anton Oilfield Services Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 34% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing, we've spotted 1 warning sign facing Anton Oilfield Services Group that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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