What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, CNOOC Energy Technology & Services (SHSE:600968) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for CNOOC Energy Technology & Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CN¥3.6b ÷ (CN¥46b - CN¥17b) (Based on the trailing twelve months to June 2024).
So, CNOOC Energy Technology & Services has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 6.8% it's much better.
In the above chart we have measured CNOOC Energy Technology & Services' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for CNOOC Energy Technology & Services .
So How Is CNOOC Energy Technology & Services' ROCE Trending?
We like the trends that we're seeing from CNOOC Energy Technology & Services. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed has increased too, by 42%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Our Take On CNOOC Energy Technology & Services' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what CNOOC Energy Technology & Services has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 37% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
On a separate note, we've found 1 warning sign for CNOOC Energy Technology & Services you'll probably want to know about.
While CNOOC Energy Technology & Services may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
