Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at COFCO Capital Holdings (SZSE:002423) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on COFCO Capital Holdings is:

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

0.036 = CN¥3.1b ÷ (CN¥128b - CN¥42b) (Based on the trailing twelve months to September 2023).

Therefore, COFCO Capital Holdings has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 7.0%.

View our latest analysis for COFCO Capital Holdings

In the above chart we have measured COFCO Capital Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering COFCO Capital Holdings here for free.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at COFCO Capital Holdings. The company has employed 77% more capital in the last four years, and the returns on that capital have remained stable at 3.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

Long story short, while COFCO Capital Holdings has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 27% in the last three years. Therefore based on the analysis done in this article, we don't think COFCO Capital Holdings has the makings of a multi-bagger.

COFCO Capital Holdings does have some risks though, and we've spotted 1 warning sign for COFCO Capital Holdings 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.

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.