China Oil And Gas Group's (HKG:603) Returns Have Hit A Wall

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at China Oil And Gas Group (HKG:603), it didn't seem to tick all of these boxes.

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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. Analysts use this formula to calculate it for China Oil And Gas Group:

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

0.09 = HK$1.4b ÷ (HK$21b - HK$5.4b) (Based on the trailing twelve months to December 2024).

Thus, China Oil And Gas Group has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Gas Utilities industry average of 8.3%.

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

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at China Oil And Gas Group. Over the past five years, ROCE has remained relatively flat at around 9.0% and the business has deployed 24% 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 China Oil And Gas Group's ROCE

Long story short, while China Oil And Gas Group has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with China Oil And Gas Group (including 1 which doesn't sit too well with us) .

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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.