The Trend Of High Returns At CHK Oil (HKG:632) Has Us Very Interested

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of CHK Oil (HKG:632) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for CHK Oil:

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

0.31 = HK$165m ÷ (HK$566m - HK$40m) (Based on the trailing twelve months to June 2022).

So, CHK Oil has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 12%.

Check out our latest analysis for CHK Oil

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

What Does the ROCE Trend For CHK Oil Tell Us?

CHK Oil has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 31% on its capital. Not only that, but the company is utilizing 23% more capital than before, but that's to be expected from a company 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.

What We Can Learn From CHK Oil's ROCE

In summary, it's great to see that CHK Oil has managed to break into profitability and is continuing to reinvest in its business. Although the company may be facing some issues elsewhere since the stock has plunged 92% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to know some of the risks facing CHK Oil we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

CHK Oil is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.