Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Having said that, from a first glance at Sinopec Oilfield Equipment (SZSE:000852) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sinopec Oilfield Equipment:

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

0.045 = CN¥148m ÷ (CN¥9.8b - CN¥6.5b) (Based on the trailing twelve months to March 2024).

So, Sinopec Oilfield Equipment has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.5%.

Above you can see how the current ROCE for Sinopec Oilfield Equipment compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sinopec Oilfield Equipment .

What Can We Tell From Sinopec Oilfield Equipment's ROCE Trend?

In terms of Sinopec Oilfield Equipment's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.5% from 5.7% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Sinopec Oilfield Equipment has done well to pay down its current liabilities to 66% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 66% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

To conclude, we've found that Sinopec Oilfield Equipment is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 27% in the last five years. Therefore based on the analysis done in this article, we don't think Sinopec Oilfield Equipment has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with Sinopec Oilfield Equipment (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While Sinopec Oilfield Equipment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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