Ouhua Energy Holdings (SGX:AJ2) Might Have The Makings Of A Multi-Bagger

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Ouhua Energy Holdings (SGX:AJ2) so let's look a bit deeper.

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. To calculate this metric for Ouhua Energy Holdings, this is the formula:

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

0.17 = CN¥58m ÷ (CN¥1.0b - CN¥664m) (Based on the trailing twelve months to June 2024).

Thus, Ouhua Energy Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Oil and Gas industry.

Check out our latest analysis for Ouhua Energy Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ouhua Energy Holdings' ROCE against it's prior returns. If you're interested in investigating Ouhua Energy Holdings' past further, check out this free graph covering Ouhua Energy Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

We like the trends that we're seeing from Ouhua Energy Holdings. The data shows that returns on capital have increased substantially over the last five years to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 83%. So we're very much inspired by what we're seeing at Ouhua Energy Holdings thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Ouhua Energy Holdings has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Ouhua Energy Holdings' ROCE

In summary, it's great to see that Ouhua Energy Holdings 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 a remarkable 545% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Ouhua Energy Holdings we've found 3 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While Ouhua Energy Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.