China Petroleum & Chemical's (HKG:386) Returns Have Hit A Wall

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at China Petroleum & Chemical (HKG:386) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for China Petroleum & Chemical, this is the formula:

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

0.05 = CN¥70b ÷ (CN¥2.1t - CN¥696b) (Based on the trailing twelve months to September 2024).

Therefore, China Petroleum & Chemical has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 6.9%.

Check out our latest analysis for China Petroleum & Chemical

In the above chart we have measured China Petroleum & Chemical'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 analyst report for China Petroleum & Chemical .

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for China Petroleum & Chemical's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect China Petroleum & Chemical to be a multi-bagger going forward. That probably explains why China Petroleum & Chemical has been paying out 70% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

Our Take On China Petroleum & Chemical's ROCE

We can conclude that in regards to China Petroleum & Chemical's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 50% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 1 warning sign for China Petroleum & Chemical you'll probably want to know about.

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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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.