Zhongyu Energy Holdings (HKG:3633) Hasn't Managed To Accelerate Its Returns

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Zhongyu Energy Holdings (HKG:3633), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. 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).

Thus, Zhongyu Energy Holdings has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Gas Utilities industry average of 8.8%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Zhongyu Energy Holdings, check out these free graphs here.

How Are Returns Trending?

The returns on capital haven't changed much for Zhongyu Energy Holdings in recent years. The company has consistently earned 7.8% for the last five years, and the capital employed within the business has risen 137% in that time. 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.

What We Can Learn From Zhongyu Energy Holdings' ROCE

As we've seen above, Zhongyu Energy Holdings' returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 81% 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.

If you want to continue researching Zhongyu Energy Holdings, you might be interested to know about the 4 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.