What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at Yankuang Energy Group (HKG:1171) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Yankuang Energy Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = CN¥35b ÷ (CN¥338b - CN¥120b) (Based on the trailing twelve months to September 2023).
Thus, Yankuang Energy Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Oil and Gas industry.
Above you can see how the current ROCE for Yankuang Energy Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yankuang Energy Group for free.
What The Trend Of ROCE Can Tell Us
Yankuang Energy Group is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 62%. So we're very much inspired by what we're seeing at Yankuang Energy Group thanks to its ability to profitably reinvest capital.
The Key Takeaway
To sum it up, Yankuang Energy Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 581% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Like most companies, Yankuang Energy Group does come with some risks, and we've found 3 warning signs that you should be aware of.
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.
