If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at CGN Mining (HKG:1164) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on CGN Mining is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = HK$66m ÷ (HK$6.8b - HK$1.4b) (Based on the trailing twelve months to December 2023).
So, CGN Mining has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.5%.
Above you can see how the current ROCE for CGN Mining compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CGN Mining for free.
The Trend Of ROCE
In terms of CGN Mining's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.2% from 3.9% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From CGN Mining's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that CGN Mining is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 365% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
One more thing, we've spotted 1 warning sign facing CGN Mining that you might find interesting.
While CGN Mining isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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