Energy International Investments Holdings' (HKG:353) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Energy International Investments Holdings' (HKG:353) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Energy International Investments Holdings:

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

0.056 = HK$113m ÷ (HK$2.3b - HK$246m) (Based on the trailing twelve months to September 2021).

Thus, Energy International Investments Holdings has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 8.6%.

View our latest analysis for Energy International Investments Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Energy International Investments Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Energy International Investments Holdings' ROCE Trend?

The fact that Energy International Investments Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 5.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Energy International Investments Holdings is utilizing 116% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 11%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Energy International Investments Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

To the delight of most shareholders, Energy International Investments Holdings has now broken into profitability. And since the stock has fallen 45% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing Energy International Investments Holdings, we've discovered 1 warning sign that you should be aware of.

While Energy International Investments Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.