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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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at China Aviation Oil (Singapore) (SGX:G92) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on China Aviation Oil (Singapore) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = US$10m ÷ (US$1.8b - US$849m) (Based on the trailing twelve months to June 2023).
So, China Aviation Oil (Singapore) has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.
See our latest analysis for China Aviation Oil (Singapore)
Above you can see how the current ROCE for China Aviation Oil (Singapore) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is China Aviation Oil (Singapore)'s ROCE Trending?
On the surface, the trend of ROCE at China Aviation Oil (Singapore) doesn't inspire confidence. To be more specific, ROCE has fallen from 2.7% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, China Aviation Oil (Singapore) has decreased its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.