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How Good Is China Oil And Gas Group Limited (HKG:603) At Creating Shareholder Value?

Simply Wall St

Today we'll evaluate China Oil And Gas Group Limited (HKG:603) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for China Oil And Gas Group:

0.095 = HK$898m ÷ (HK$16b - HK$6.5b) (Based on the trailing twelve months to June 2019.)

Therefore, China Oil And Gas Group has an ROCE of 9.5%.

View our latest analysis for China Oil And Gas Group

Does China Oil And Gas Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, China Oil And Gas Group's ROCE appears to be around the 9.3% average of the Gas Utilities industry. Separate from how China Oil And Gas Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

You can click on the image below to see (in greater detail) how China Oil And Gas Group's past growth compares to other companies.

SEHK:603 Past Revenue and Net Income, October 21st 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If China Oil And Gas Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How China Oil And Gas Group's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

China Oil And Gas Group has total liabilities of HK$6.5b and total assets of HK$16b. As a result, its current liabilities are equal to approximately 41% of its total assets. China Oil And Gas Group has a medium level of current liabilities, which would boost its ROCE somewhat.

What We Can Learn From China Oil And Gas Group's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

China Oil And Gas Group is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.