Can Ouhua Energy Holdings (SGX:AJ2) Continue To Grow Its Returns On Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Speaking of which, we noticed some great changes in Ouhua Energy Holdings' (SGX:AJ2) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Ouhua Energy Holdings:

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

0.067 = CN¥14m ÷ (CN¥458m - CN¥251m) (Based on the trailing twelve months to June 2020).

Therefore, Ouhua Energy Holdings has an ROCE of 6.7%. On its own, that's a low figure but it's around the 6.0% average generated by the Oil and Gas industry.

View our latest analysis for Ouhua Energy Holdings

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 Ouhua Energy Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Ouhua Energy Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 6.7% on its capital. And unsurprisingly, like most companies trying to break into the black, Ouhua Energy Holdings is utilizing 282% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 55%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Ouhua Energy Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Key Takeaway

Long story short, we're delighted to see that Ouhua Energy Holdings' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 40% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Ouhua Energy Holdings (of which 3 shouldn't be ignored!) that you should know about.

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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