Investors Could Be Concerned With Huaibei Mining HoldingsLtd's (SHSE:600985) 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Huaibei Mining HoldingsLtd (SHSE:600985) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Huaibei Mining HoldingsLtd, this is the formula:

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

0.12 = CN¥7.2b ÷ (CN¥87b - CN¥27b) (Based on the trailing twelve months to December 2023).

Therefore, Huaibei Mining HoldingsLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Metals and Mining industry.

See our latest analysis for Huaibei Mining HoldingsLtd

In the above chart we have measured Huaibei Mining HoldingsLtd'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 Huaibei Mining HoldingsLtd .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Huaibei Mining HoldingsLtd, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 12%. However it looks like Huaibei Mining HoldingsLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Huaibei Mining HoldingsLtd has decreased its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Huaibei Mining HoldingsLtd's ROCE

To conclude, we've found that Huaibei Mining HoldingsLtd is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 115% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching Huaibei Mining HoldingsLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Huaibei Mining HoldingsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.