Return Trends At PetroChina (HKG:857) Aren't Appealing

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at PetroChina (HKG:857) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for PetroChina:

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

0.04 = CN¥79b ÷ (CN¥2.5t - CN¥571b) (Based on the trailing twelve months to March 2021).

Thus, PetroChina has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.1%.

View our latest analysis for PetroChina

In the above chart we have measured PetroChina's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PetroChina here for free.

The Trend Of ROCE

Over the past five years, PetroChina's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect PetroChina to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that PetroChina has been paying out a decent 50% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Bottom Line

In summary, PetroChina isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

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

While PetroChina 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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