Yanchang Petroleum International (HKG:346) Might Have The Makings Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Yanchang Petroleum International's (HKG:346) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Yanchang Petroleum International:

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

0.022 = HK$29m ÷ (HK$4.7b - HK$3.3b) (Based on the trailing twelve months to June 2021).

Therefore, Yanchang Petroleum International has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 8.3%.

Check out our latest analysis for Yanchang Petroleum International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yanchang Petroleum International's ROCE against it's prior returns. If you're interested in investigating Yanchang Petroleum International's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Like most people, we're pleased that Yanchang Petroleum International is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.2% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 41%. Yanchang Petroleum International could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 71% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

From what we've seen above, Yanchang Petroleum International has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 68% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Yanchang Petroleum International does have some risks though, and we've spotted 1 warning sign for Yanchang Petroleum International that you might be interested in.

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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