We Like Shan Xi Huayang Group New EnergyLtd's (SHSE:600348) Returns And Here's How They're Trending

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. And in light of that, the trends we're seeing at Shan Xi Huayang Group New EnergyLtd's (SHSE:600348) look very promising so lets take a look.

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. The formula for this calculation on Shan Xi Huayang Group New EnergyLtd is:

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

0.21 = CN¥11b ÷ (CN¥70b - CN¥21b) (Based on the trailing twelve months to September 2023).

Thus, Shan Xi Huayang Group New EnergyLtd has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for Shan Xi Huayang Group New EnergyLtd

In the above chart we have measured Shan Xi Huayang Group New EnergyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shan Xi Huayang Group New EnergyLtd .

The Trend Of ROCE

The trends we've noticed at Shan Xi Huayang Group New EnergyLtd are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 21%. The amount of capital employed has increased too, by 112%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Shan Xi Huayang Group New EnergyLtd has decreased current liabilities to 29% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shan Xi Huayang Group New EnergyLtd has. Since the stock has returned a staggering 217% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Shan Xi Huayang Group New EnergyLtd can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Shan Xi Huayang Group New EnergyLtd you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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.