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There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at China Aviation Oil (Singapore) (SGX:G92) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for China Aviation Oil (Singapore), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = US$18m ÷ (US$1.8b - US$826m) (Based on the trailing twelve months to December 2023).
Therefore, China Aviation Oil (Singapore) has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 5.5%.
Check out our latest analysis for China Aviation Oil (Singapore)
In the above chart we have measured China Aviation Oil (Singapore)'s 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 China Aviation Oil (Singapore) .
So How Is China Aviation Oil (Singapore)'s ROCE Trending?
In terms of China Aviation Oil (Singapore)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.9% from 3.7% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, China Aviation Oil (Singapore)'s current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On China Aviation Oil (Singapore)'s ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for China Aviation Oil (Singapore) have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.