Can China Oil And Gas Group (HKG:603) Continue To Grow Its Returns On Capital?

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So on that note, China Oil And Gas Group (HKG:603) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for China Oil And Gas Group, this is the formula:

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

0.085 = HK$1.1b ÷ (HK$17b - HK$4.8b) (Based on the trailing twelve months to June 2020).

So, China Oil And Gas Group has an ROCE of 8.5%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 11%.

View our latest analysis for China Oil And Gas Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Oil And Gas Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Oil And Gas Group, check out these free graphs here.

So How Is China Oil And Gas Group's ROCE Trending?

China Oil And Gas Group has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 57% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On China Oil And Gas Group's ROCE

To sum it up, China Oil And Gas Group is collecting higher returns from the same amount of capital, and that's impressive. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, China Oil And Gas Group does come with some risks, and we've found 2 warning signs that you should be aware of.

While China Oil And Gas Group 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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