Stock Analysis

Many Would Be Envious Of Perennial Energy Holdings' (HKG:2798) Excellent Returns On Capital

SEHK:2798
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Ergo, when we looked at the ROCE trends at Perennial Energy Holdings (HKG:2798), we liked what we saw.

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. The formula for this calculation on Perennial Energy Holdings is:

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

0.29 = CN¥729m ÷ (CN¥3.2b - CN¥726m) (Based on the trailing twelve months to December 2021).

Therefore, Perennial Energy Holdings has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

See our latest analysis for Perennial Energy Holdings

roce
SEHK:2798 Return on Capital Employed August 2nd 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Perennial Energy Holdings' ROCE against it's prior returns. If you'd like to look at how Perennial Energy Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Perennial Energy Holdings deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 29% and the business has deployed 791% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Perennial Energy Holdings has done well to reduce current liabilities to 22% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Perennial Energy Holdings' ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. However, over the last three years, the stock has only delivered a 12% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Perennial Energy Holdings and understanding it should be part of your investment process.

Perennial Energy Holdings 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.

Valuation is complex, but we're helping make it simple.

Find out whether Perennial Energy Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.