China Western Power Industrial (SZSE:002630) Might Have The Makings Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 China Western Power Industrial (SZSE:002630) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Western Power Industrial:

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

0.075 = CN¥409m ÷ (CN¥9.4b - CN¥3.9b) (Based on the trailing twelve months to June 2024).

So, China Western Power Industrial has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 5.5% generated by the Machinery industry, it's much better.

See our latest analysis for China Western Power Industrial

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 China Western Power Industrial's past further, check out this free graph covering China Western Power Industrial's past earnings, revenue and cash flow.

So How Is China Western Power Industrial's ROCE Trending?

We're delighted to see that China Western Power Industrial is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 7.5% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

One more thing to note, China Western Power Industrial has decreased current liabilities to 42% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From China Western Power Industrial's ROCE

To sum it up, China Western Power Industrial is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 17% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

China Western Power Industrial does have some risks though, and we've spotted 1 warning sign for China Western Power Industrial that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.