Returns At Shanxi Lu'an Environmental Energy Development (SHSE:601699) Appear To Be Weighed Down

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Shanxi Lu'an Environmental Energy Development (SHSE:601699) looks decent, right now, so lets see what the trend of returns can tell us.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shanxi Lu'an Environmental Energy Development:

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

0.15 = CN¥8.7b ÷ (CN¥84b - CN¥25b) (Based on the trailing twelve months to March 2024).

Therefore, Shanxi Lu'an Environmental Energy Development has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Oil and Gas industry.

View our latest analysis for Shanxi Lu'an Environmental Energy Development

In the above chart we have measured Shanxi Lu'an Environmental Energy Development's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shanxi Lu'an Environmental Energy Development for free.

So How Is Shanxi Lu'an Environmental Energy Development's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 80% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Shanxi Lu'an Environmental Energy Development has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 29% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

To sum it up, Shanxi Lu'an Environmental Energy Development has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 163% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 2 warning signs for Shanxi Lu'an Environmental Energy Development you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.

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