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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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.
What Is 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. Analysts use this formula to calculate it for China Aviation Oil (Singapore):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = US$30m ÷ (US$2.2b - US$1.3b) (Based on the trailing twelve months to June 2024).
So, China Aviation Oil (Singapore) has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 12%.
View 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for China Aviation Oil (Singapore) .
What Does the ROCE Trend For China Aviation Oil (Singapore) Tell Us?
Over the past five years, China Aviation Oil (Singapore)'s ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at China Aviation Oil (Singapore) in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why China Aviation Oil (Singapore) is paying out 40% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
On a side note, China Aviation Oil (Singapore) has done well to reduce current liabilities to 57% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.