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What are the first trends to look for to identify a title that could multiply over the long term? Generally, we will want to notice a growing trend return on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked Henan Jinma Energy (HKG: 6885) and its trend of ROCE, we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Henan Jinma Energy is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.19 = CN Â¥ 822m ÷ (CN Â¥ 6.4b – CN Â¥ 2.0b) (Based on the last twelve months up to December 2020).
Therefore, Henan Jinma Energy has a ROCE of 19%. On its own, that’s a standard return, but it’s far better than the 8.8% generated by the metals and mining industry.
Check out our latest analysis for Henan Jinma Energy
Historical performance is a great place to start when looking for a stock. So above you can see the gauge of Henan Jinma Energy’s ROCE compared to its past returns. If you want to delve into the history of Henan Jinma Energy’s earnings, income and cash flow, check out these free graphics here.
The ROCE trend
Investors would be delighted with what happens at Henan Jinma Energy. Over the past five years, returns on capital employed have increased substantially to 19%. The amount of capital employed also increased by 507%. This may indicate that there are many opportunities to invest capital internally and at increasingly higher rates, a common combination among multi-baggers.
One more thing to note, Henan Jinma Energy reduced current liabilities to 31% of total assets during this period, effectively reducing the amount of supplier or short-term creditors financing. Therefore, we can be assured that ROCE growth is the result of fundamental company improvements, rather than a cooking class featuring that company’s books.
What we can learn from Henan Jinma Energy’s ROCE
Overall, it is great to see that Henan Jinma Energy is reaping the rewards of past investments and increasing its capital base. Given that the stock has only returned 15% to shareholders over the past three years, the promising fundamentals may not yet be recognized by investors. Therefore, further exploring this stock might reveal a good opportunity, if valuation and other metrics stack up.
On a final note, we found 1 warning sign for Henan Jinma Energy that we think you should be aware of.
Although Henan Jinma Energy does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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