The Return Trends At Grand Ocean Advanced Resources (HKG:65) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Grand Ocean Advanced Resources' (HKG:65) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Grand Ocean Advanced Resources, this is the formula:

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).

So, Grand Ocean Advanced Resources has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Oil and Gas industry.

Check out the opportunities and risks within the HK Oil and Gas industry.

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

Grand Ocean Advanced Resources is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 38% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

One more thing to note, Grand Ocean Advanced Resources has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Grand Ocean Advanced Resources' ROCE

To bring it all together, Grand Ocean Advanced Resources has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 23% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 2 warning signs for Grand Ocean Advanced Resources you'll probably want to know about.

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.