Returns On Capital - An Important Metric For Hengyuan Refining Company Berhad (KLSE:HENGYUAN)

There are a few key trends to look for if we want to identify the next multi-bagger. 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 Hengyuan Refining Company Berhad (KLSE:HENGYUAN) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hengyuan Refining Company Berhad:

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

0.0019 = RM5.5m ÷ (RM4.5b - RM1.6b) (Based on the trailing twelve months to September 2020).

So, Hengyuan Refining Company Berhad has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 7.6%.

See our latest analysis for Hengyuan Refining Company Berhad

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 want to delve into the historical earnings, revenue and cash flow of Hengyuan Refining Company Berhad, check out these free graphs here.

The Trend Of ROCE

Hengyuan Refining Company Berhad has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 0.2% which is a sight for sore eyes. Not only that, but the company is utilizing 380% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Hengyuan Refining Company Berhad has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Hengyuan Refining Company Berhad's ROCE

Overall, Hengyuan Refining Company Berhad gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Hengyuan Refining Company Berhad can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Hengyuan Refining Company Berhad, we've spotted 3 warning signs, and 1 of them is concerning.

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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