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Returns On Capital At Zhongyu Energy Holdings (HKG:3633) Have Stalled

Simply Wall St ·  {{timeTz}}

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Zhongyu Energy Holdings (HKG:3633), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Zhongyu Energy Holdings is:

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

0.078 = HK$1.3b ÷ (HK$27b - HK$10b) (Based on the trailing twelve months to June 2022).

Therefore, Zhongyu Energy Holdings has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Gas Utilities industry average of 8.8%.

See our latest analysis for Zhongyu Energy Holdings

roceSEHK:3633 Return on Capital Employed September 22nd 2022

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Zhongyu Energy Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Zhongyu Energy Holdings in recent years. The company has consistently earned 7.8% for the last five years, and the capital employed within the business has risen 137% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Zhongyu Energy Holdings' ROCE

Long story short, while Zhongyu Energy Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 101% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Zhongyu Energy Holdings, you might be interested to know about the 4 warning signs that our analysis has discovered.

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.

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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