Grand Ocean Advanced Resources (HKG:65) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Grand Ocean Advanced Resources (HKG:65) and its trend of ROCE, we really liked what we saw.

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 Grand Ocean Advanced Resources:

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

0.14 = HK$30m ÷ (HK$263m - HK$53m) (Based on the trailing twelve months to June 2022).

Therefore, Grand Ocean Advanced Resources has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Oil and Gas industry.

See our latest analysis for Grand Ocean Advanced Resources

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

What Does the ROCE Trend For Grand Ocean Advanced Resources Tell Us?

Grand Ocean Advanced Resources is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 36% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 20%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

To sum it up, Grand Ocean Advanced Resources is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 61% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing Grand Ocean Advanced Resources we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Grand Ocean Advanced Resources 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.