Slowing Rates Of Return At Inner Mongolia Dian Tou Energy (SZSE:002128) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Inner Mongolia Dian Tou Energy (SZSE:002128) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Inner Mongolia Dian Tou Energy is:

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

0.16 = CN¥7.3b ÷ (CN¥53b - CN¥6.6b) (Based on the trailing twelve months to September 2024).

So, Inner Mongolia Dian Tou Energy has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 10.0% it's much better.

Check out our latest analysis for Inner Mongolia Dian Tou Energy

Above you can see how the current ROCE for Inner Mongolia Dian Tou Energy 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 Inner Mongolia Dian Tou Energy for free.

So How Is Inner Mongolia Dian Tou Energy's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 106% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that Inner Mongolia Dian Tou Energy 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.

On a side note, Inner Mongolia Dian Tou Energy has done well to reduce current liabilities to 12% of total assets over the last five years. 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.

What We Can Learn From Inner Mongolia Dian Tou Energy's ROCE

The main thing to remember is that Inner Mongolia Dian Tou Energy has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 196% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you're still interested in Inner Mongolia Dian Tou Energy it's worth checking out our FREE intrinsic value approximation for 002128 to see if it's trading at an attractive price in other respects.

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.