Returns Are Gaining Momentum At Energy International Investments Holdings (HKG:353)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Energy International Investments Holdings (HKG:353) looks quite promising in regards to its trends of return on capital.

Understanding 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 Energy International Investments Holdings:

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

0.06 = HK$111m ÷ (HK$2.3b - HK$501m) (Based on the trailing twelve months to March 2022).

Thus, Energy International Investments Holdings has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.1%.

See our latest analysis for Energy International Investments Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Energy International Investments Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Energy International Investments Holdings, check out these free graphs here.

What Does the ROCE Trend For Energy International Investments Holdings Tell Us?

The fact that Energy International Investments Holdings is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.0% on its capital. In addition to that, Energy International Investments Holdings is employing 110% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Energy International Investments Holdings' ROCE

In summary, it's great to see that Energy International Investments Holdings has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 53% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Energy International Investments Holdings (of which 2 are a bit unpleasant!) that you should know about.

While Energy International Investments Holdings 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.