Here's What's Concerning About Anhui Hengyuan Coal Industry and Electricity PowerLtd's (SHSE:600971) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Anhui Hengyuan Coal Industry and Electricity PowerLtd (SHSE:600971), we don't think it's current trends fit the mold of a multi-bagger.

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 Anhui Hengyuan Coal Industry and Electricity PowerLtd:

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

0.12 = CN¥1.8b ÷ (CN¥21b - CN¥6.0b) (Based on the trailing twelve months to June 2024).

So, Anhui Hengyuan Coal Industry and Electricity PowerLtd has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 11%.

View our latest analysis for Anhui Hengyuan Coal Industry and Electricity PowerLtd

In the above chart we have measured Anhui Hengyuan Coal Industry and Electricity PowerLtd'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 Anhui Hengyuan Coal Industry and Electricity PowerLtd .

So How Is Anhui Hengyuan Coal Industry and Electricity PowerLtd's ROCE Trending?

In terms of Anhui Hengyuan Coal Industry and Electricity PowerLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 15% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Anhui Hengyuan Coal Industry and Electricity PowerLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Anhui Hengyuan Coal Industry and Electricity PowerLtd's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 119% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 2 warning signs for Anhui Hengyuan Coal Industry and Electricity PowerLtd you'll probably want to know about.

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.