Stock Analysis

Has Puxing Energy (HKG:90) Got What It Takes To Become A Multi-Bagger?

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SEHK:90
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think Puxing Energy (HKG:90) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 Puxing Energy is:

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

0.099 = CN¥103m ÷ (CN¥1.2b - CN¥193m) (Based on the trailing twelve months to June 2020).

Thus, Puxing Energy has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 7.5%.

Check out our latest analysis for Puxing Energy

roce
SEHK:90 Return on Capital Employed December 2nd 2020

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'd like to look at how Puxing Energy has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Puxing Energy Tell Us?

There hasn't been much to report for Puxing Energy's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Puxing Energy doesn't end up being a multi-bagger in a few years time.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 16% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Puxing Energy's ROCE

In a nutshell, Puxing Energy has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 46% 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 Puxing Energy has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Puxing Energy (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Puxing Energy 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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