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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Sinopec Oilfield Equipment (SZSE:000852) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sinopec Oilfield Equipment is:

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

0.047 = CN¥163m ÷ (CN¥10b - CN¥6.9b) (Based on the trailing twelve months to September 2024).

Therefore, Sinopec Oilfield Equipment has an ROCE of 4.7%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

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're interested in investigating Sinopec Oilfield Equipment's past further, check out this free graph covering Sinopec Oilfield Equipment's past earnings, revenue and cash flow.

What Can We Tell From Sinopec Oilfield Equipment's ROCE Trend?

The returns on capital haven't changed much for Sinopec Oilfield Equipment in recent years. Over the past five years, ROCE has remained relatively flat at around 4.7% and the business has deployed 69% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Sinopec Oilfield Equipment has done well to reduce current liabilities to 66% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 66%, some of that risk is still prevalent.

The Bottom Line On Sinopec Oilfield Equipment's ROCE

Long story short, while Sinopec Oilfield Equipment has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 1.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Sinopec Oilfield Equipment (of which 1 is significant!) that you should know about.

While Sinopec Oilfield Equipment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.