Zhongyu Energy Holdings (HKG:3633) Has Some Way To Go To Become A Multi-Bagger

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Zhongyu Energy Holdings (HKG:3633) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Zhongyu Energy Holdings, this is the formula:

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

0.078 = HK$1.3b ÷ (HK$27b - HK$10b) (Based on the trailing twelve months to June 2022).

Therefore, Zhongyu Energy Holdings has an ROCE of 7.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.4%.

View our latest analysis for Zhongyu Energy Holdings

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

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Zhongyu Energy Holdings. Over the past five years, ROCE has remained relatively flat at around 7.8% and the business has deployed 137% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Zhongyu Energy Holdings' ROCE

In summary, Zhongyu Energy Holdings has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Zhongyu Energy Holdings has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Zhongyu Energy Holdings and understanding them should be part of your investment process.

While Zhongyu Energy Holdings 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.