To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Geo-Jade Petroleum (SHSE:600759) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Geo-Jade Petroleum is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥861m ÷ (CN¥13b - CN¥5.0b) (Based on the trailing twelve months to March 2023).
Thus, Geo-Jade Petroleum has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Oil and Gas industry average it falls behind.
See our latest analysis for Geo-Jade Petroleum
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 Geo-Jade Petroleum, check out these free graphs here.
How Are Returns Trending?
Geo-Jade Petroleum has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 46%. The company is now earning CN¥0.1 per dollar of capital employed. In regards to capital employed, Geo-Jade Petroleum appears to been achieving more with less, since the business is using 22% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Bottom Line On Geo-Jade Petroleum's ROCE
In the end, Geo-Jade Petroleum has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 39% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Geo-Jade Petroleum does have some risks though, and we've spotted 1 warning sign for Geo-Jade Petroleum that you might be interested in.
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.
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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.