Zhongyu Energy Holdings (HKG:3633) Will Be Hoping To Turn Its Returns On Capital Around

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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?

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. Analysts use this formula to calculate it for Zhongyu Energy Holdings:

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

0.072 = HK$1.0b ÷ (HK$26b - HK$12b) (Based on the trailing twelve months to December 2023).

So, Zhongyu Energy Holdings has an ROCE of 7.2%. On its own, that's a low figure but it's around the 8.4% average generated by the Gas Utilities industry.

Check out our latest analysis for Zhongyu Energy Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhongyu Energy Holdings' past further, check out this free graph covering Zhongyu Energy Holdings' past earnings, revenue and cash flow.

What Can We Tell From Zhongyu Energy Holdings' ROCE Trend?

On the surface, the trend of ROCE at Zhongyu Energy Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.2% from 18% five years ago. However it looks like Zhongyu Energy Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Zhongyu Energy Holdings has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Zhongyu Energy Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 30% 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.

If you'd like to know about the risks facing Zhongyu Energy Holdings, we've discovered 2 warning signs that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.