Kunlun Energy (HKG:135) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Kunlun Energy (HKG:135), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Kunlun Energy:

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

0.063 = CN¥7.0b ÷ (CN¥155b - CN¥45b) (Based on the trailing twelve months to December 2020).

Therefore, Kunlun Energy has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 10%.

See our latest analysis for Kunlun Energy

Above you can see how the current ROCE for Kunlun Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kunlun Energy.

What Can We Tell From Kunlun Energy's ROCE Trend?

On the surface, the trend of ROCE at Kunlun Energy doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.3% from 9.3% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Kunlun Energy's ROCE

To conclude, we've found that Kunlun Energy is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 94% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 2 warning signs facing Kunlun Energy that you might find interesting.

While Kunlun 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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