If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Shanxi Guoxin Energy (SHSE:600617) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for Shanxi Guoxin Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = CN¥733m ÷ (CN¥29b - CN¥12b) (Based on the trailing twelve months to September 2023).
Thus, Shanxi Guoxin Energy has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 12%.
See our latest analysis for Shanxi Guoxin Energy
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanxi Guoxin Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shanxi Guoxin Energy, check out these free graphs here.
So How Is Shanxi Guoxin Energy's ROCE Trending?
Things have been pretty stable at Shanxi Guoxin Energy, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Shanxi Guoxin Energy doesn't end up being a multi-bagger in a few years time.
On a side note, Shanxi Guoxin Energy's current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Shanxi Guoxin Energy's ROCE
In summary, Shanxi Guoxin Energy isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 19% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you'd like to know more about Shanxi Guoxin Energy, we've spotted 2 warning signs, and 1 of them is significant.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.