CHK Oil (HKG:632) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at CHK Oil (HKG:632) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for CHK Oil, this is the formula:

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

0.05 = HK$17m ÷ (HK$543m - HK$194m) (Based on the trailing twelve months to December 2020).

Therefore, CHK Oil has an ROCE of 5.0%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 5.9%.

View our latest analysis for CHK Oil

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 CHK Oil's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From CHK Oil's ROCE Trend?

It's great to see that CHK Oil has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 5.0% which is no doubt a relief for some early shareholders. In regards to capital employed, CHK Oil is using 27% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 36% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

In a nutshell, we're pleased to see that CHK Oil has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

If you want to continue researching CHK Oil, you might be interested to know about the 2 warning signs that our analysis has discovered.

While CHK Oil 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.
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