If you're looking for a multi-bagger, there's a few things to 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. So on that note, AAG Energy Holdings (HKG:2686) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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 AAG Energy Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = CN¥1.1b ÷ (CN¥8.1b - CN¥990m) (Based on the trailing twelve months to December 2021).
Thus, AAG Energy Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Oil and Gas industry.
View our latest analysis for AAG Energy Holdings
SEHK:2686 Return on Capital Employed June 2nd 2022Historical performance is a great place to start when researching a stock so above you can see the gauge for AAG Energy Holdings' ROCE against it's prior returns. If you'd like to look at how AAG Energy Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
AAG Energy Holdings is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. The amount of capital employed has increased too, by 29%. So we're very much inspired by what we're seeing at AAG Energy Holdings thanks to its ability to profitably reinvest capital.
The Bottom Line On AAG Energy Holdings' ROCE
All in all, it's terrific to see that AAG Energy Holdings is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 51% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a separate note, we've found 1 warning sign for AAG Energy Holdings you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.