Under The Bonnet, Shaanxi Coal Industry's (SHSE:601225) Returns Look Impressive

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 Shaanxi Coal Industry's (SHSE:601225) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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 Shaanxi Coal Industry is:

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

0.31 = CN¥48b ÷ (CN¥205b - CN¥51b) (Based on the trailing twelve months to September 2023).

Therefore, Shaanxi Coal Industry has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 12%.

Check out our latest analysis for Shaanxi Coal Industry

Above you can see how the current ROCE for Shaanxi Coal Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shaanxi Coal Industry for free.

What Does the ROCE Trend For Shaanxi Coal Industry Tell Us?

We like the trends that we're seeing from Shaanxi Coal Industry. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 67% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

All in all, it's terrific to see that Shaanxi Coal Industry is reaping the rewards from prior investments and is growing its capital base. And a remarkable 306% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Shaanxi Coal Industry does come with some risks, and we've found 3 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.