Is There More Growth In Store For China Aviation Oil (Singapore)'s (SGX:G92) Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at China Aviation Oil (Singapore) (SGX:G92) so let's look a bit deeper.

What is 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. The formula for this calculation on China Aviation Oil (Singapore) is:

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

0.049 = US$41m ÷ (US$1.5b - US$717m) (Based on the trailing twelve months to June 2020).

So, China Aviation Oil (Singapore) has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 6.5%.

View our latest analysis for China Aviation Oil (Singapore)

Above you can see how the current ROCE for China Aviation Oil (Singapore) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Aviation Oil (Singapore).

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 4.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 44% more capital is being employed now too. So we're very much inspired by what we're seeing at China Aviation Oil (Singapore) thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 46%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China Aviation Oil (Singapore) has. And a remarkable 121% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 1 warning sign with China Aviation Oil (Singapore) and understanding this should be part of your investment process.

While China Aviation Oil (Singapore) 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. 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.
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