We like these underlying capital return trends at CHK Oil (HKG: 632)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. So on that note, CHK oil (HKG:632) looks quite promising in terms of its capital return trends.
Understanding return on capital employed (ROCE)
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on CHK Oil is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = HK$68 million ÷ (HK$514 million – HK$135 million) (Based on the last twelve months to June 2021).
Thereby, CHK Oil has a ROCE of 18%. By itself, that’s a standard return, but it’s far better than the 8.6% generated by the oil and gas industry.
Check out our latest analysis for CHK Oil
Historical performance is a great starting point when researching a stock. So you can see above the gauge of CHK Oil’s ROCE compared to its past returns. If you want to dive deep into CHK Oil’s earnings, revenue, and cash flow history, check out these free graphics here.
So what is CHK Oil’s ROCE trend?
It’s great to see that CHK Oil has started generating pre-tax profits from past investments. Although the company is profitable today, it suffered losses on invested capital five years ago. At first glance, it appears that the company is becoming more efficient at generating returns, as over the same period the amount of capital employed has decreased by 20%. CHK Oil may sell underperforming assets as ROCE improves.
For the record though, there was a notable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. In effect, this means that suppliers or short-term creditors now finance 26% of the activity, which is more than five years ago. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, certain aspects of risk also increase.
The Key Takeaway
From what we have seen above, CHK Oil has managed to increase its return on capital while reducing its capital base. And since the stock has plunged 95% in the past five years, other factors may affect the company’s outlook. Still, it’s worth doing some additional research to see if the trends will continue in the future.
If you want to know more about CHK Oil, we spotted 3 warning signs, and 1 of them should not be ignored.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.