To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at CITIC Offshore Helicopter (SZSE:000099) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for CITIC Offshore Helicopter, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = CN¥334m ÷ (CN¥6.6b - CN¥576m) (Based on the trailing twelve months to September 2024).
So, CITIC Offshore Helicopter has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 7.5%.
In the above chart we have measured CITIC Offshore Helicopter's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CITIC Offshore Helicopter .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at CITIC Offshore Helicopter, we didn't gain much confidence. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 5.6%. However it looks like CITIC Offshore Helicopter might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, CITIC Offshore Helicopter has decreased its current liabilities to 8.8% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.
Our Take On CITIC Offshore Helicopter's ROCE
In summary, CITIC Offshore Helicopter is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 215% 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.
CITIC Offshore Helicopter does have some risks though, and we've spotted 1 warning sign for CITIC Offshore Helicopter that you might be interested in.
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.
