Stock Analysis

Puxing Energy (HKG:90) Is Looking To Continue Growing Its Returns On Capital

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SEHK:90
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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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Puxing Energy (HKG:90) and its trend of ROCE, we really liked what we saw.

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 Puxing Energy is:

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

0.14 = CN¥200m ÷ (CN¥1.9b - CN¥483m) (Based on the trailing twelve months to June 2021).

Therefore, Puxing Energy has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 6.9% it's much better.

Check out our latest analysis for Puxing Energy

roce
SEHK:90 Return on Capital Employed October 12th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Puxing Energy's ROCE against it's prior returns. 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 The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Puxing Energy. 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, 24% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Puxing Energy's ROCE

In summary, it's great to see that Puxing Energy 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. And since the stock has fallen 16% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 4 warning signs with Puxing Energy and understanding these should be part of your investment process.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Puxing Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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