China Oil And Gas Group (HKG:603) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at China Oil And Gas Group (HKG:603) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on China Oil And Gas Group is:

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

0.14 = HK$2.3b ÷ (HK$23b - HK$6.2b) (Based on the trailing twelve months to June 2022).

Therefore, China Oil And Gas Group has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Gas Utilities industry.

Check out 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're interested in investigating China Oil And Gas Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China Oil And Gas Group Tell Us?

Investors would be pleased with what's happening at China Oil And Gas Group. Over the last five years, returns on capital employed have risen substantially to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 48% more capital is being employed now too. So we're very much inspired by what we're seeing at China Oil And Gas Group thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that China Oil And Gas Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 52% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

China Oil And Gas Group does have some risks though, and we've spotted 1 warning sign for China Oil And Gas Group that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.