Investors Will Want Grand Ocean Advanced Resources' (HKG:65) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Grand Ocean Advanced Resources' (HKG:65) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Grand Ocean Advanced Resources, this is the formula:

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

0.064 = HK$14m ÷ (HK$305m - HK$91m) (Based on the trailing twelve months to December 2022).

So, Grand Ocean Advanced Resources has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 6.8%.

View 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're interested in investigating Grand Ocean Advanced Resources' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Shareholders will be relieved that Grand Ocean Advanced Resources has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 6.4% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

On a related note, the company's ratio of current liabilities to total assets has decreased to 30%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

To sum it up, Grand Ocean Advanced Resources is collecting higher returns from the same amount of capital, and that's impressive. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 4 warning signs for Grand Ocean Advanced Resources that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.