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Zhongyu Energy Holdings (HKG:3633) Could Be Struggling To Allocate Capital

Simply Wall St ·  {{timeTz}}

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Zhongyu Energy Holdings (HKG:3633) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zhongyu Energy Holdings is:

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

0.074 = HK$1.4b ÷ (HK$27b - HK$8.4b) (Based on the trailing twelve months to December 2021).

Thus, Zhongyu Energy Holdings has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 10%.

See our latest analysis for Zhongyu Energy Holdings

SEHK:3633 Return on Capital Employed June 19th 2022

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zhongyu Energy Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.4% from 9.3% 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.

In Conclusion...

While returns have fallen for Zhongyu Energy Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 242% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Zhongyu Energy Holdings we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Zhongyu 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

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