There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Chu Kong Petroleum and Natural Gas Steel Pipe Holdings (HKG:1938) and its trend of ROCE, we really liked what we saw.

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chu Kong Petroleum and Natural Gas Steel Pipe Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.028 = CN¥92m ÷ (CN¥7.4b - CN¥4.2b) (Based on the trailing twelve months to June 2022).

Thus, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.8%.

See our latest analysis for Chu Kong Petroleum and Natural Gas Steel Pipe Holdings

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're interested in investigating Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

It's great to see that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.8% on their capital employed. In regards to capital employed, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings is using 35% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Chu Kong Petroleum and Natural Gas Steel Pipe Holdings could be selling under-performing assets since the ROCE is improving.

On a side note, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' current liabilities are still rather high at 56% 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.

In summary, it's great to see that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 79% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Chu Kong Petroleum and Natural Gas Steel Pipe Holdings does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Find out whether Chu Kong Petroleum and Natural Gas Steel Pipe Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis. Find out more about our editorial guidelines and team.

Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited, an investment holding company, manufactures, sells, and exports longitudinal welded steel pipes in the People’s Republic of China and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Read more about these checks in the individual report sections or in our analysis model.

Mediocre balance sheet and slightly overvalued.

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis. Find out more about our editorial guidelines and team.

Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited, an investment holding company, manufactures, sells, and exports longitudinal welded steel pipes in the People’s Republic of China and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Read more about these checks in the individual report sections or in our analysis model.

Mediocre balance sheet and slightly overvalued.

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