What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Henan Jinma Energy (HKG:6885) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Henan Jinma Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CN¥822m ÷ (CN¥6.4b - CN¥2.0b) (Based on the trailing twelve months to December 2020).
So, Henan Jinma Energy has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Metals and Mining industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan Jinma Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Henan Jinma Energy, check out these free graphs here.
The Trend Of ROCE
Investors would be pleased with what's happening at Henan Jinma Energy. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 507%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
One more thing to note, Henan Jinma Energy has decreased current liabilities to 31% 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.
What We Can Learn From Henan Jinma Energy's ROCE
All in all, it's terrific to see that Henan Jinma Energy is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 15% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On a final note, we've found 1 warning sign for Henan Jinma Energy that we think you should be aware of.
While Henan Jinma Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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