In This Article:
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at China Aviation Oil (Singapore) (SGX:G92), it didn't seem to tick all of these boxes.
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. 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)
0.026 = US$24m ÷ (US$1.9b - US$968m) (Based on the trailing twelve months to June 2022).
Therefore, China Aviation Oil (Singapore) has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 27%.
View our latest analysis for China Aviation Oil (Singapore)
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 want to delve into the historical earnings, revenue and cash flow of China Aviation Oil (Singapore), check out these free graphs here.
What Does the ROCE Trend For China Aviation Oil (Singapore) Tell Us?
In terms of China Aviation Oil (Singapore)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 3.9% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, China Aviation Oil (Singapore)'s current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On China Aviation Oil (Singapore)'s ROCE
While returns have fallen for China Aviation Oil (Singapore) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 49% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.