If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Geo-Jade Petroleum (SHSE:600759) and its trend of ROCE, we really liked what we saw.
What is 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. The formula for this calculation on Geo-Jade Petroleum is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥882m ÷ (CN¥13b - CN¥5.3b) (Based on the trailing twelve months to March 2022).
Thus, Geo-Jade Petroleum has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Oil and Gas industry average it falls behind.
View our latest analysis for Geo-Jade Petroleum
SHSE:600759 Return on Capital Employed June 8th 2022Historical performance is a great place to start when researching a stock so above you can see the gauge for Geo-Jade Petroleum's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Geo-Jade Petroleum, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
You'd find it hard not to be impressed with the ROCE trend at Geo-Jade Petroleum. We found that the returns on capital employed over the last five years have risen by 517%. The company is now earning CN¥0.1 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 34% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Geo-Jade Petroleum may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Key Takeaway
From what we've seen above, Geo-Jade Petroleum has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 62% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Geo-Jade Petroleum does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
While Geo-Jade Petroleum 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.