Returns On Capital Signal Tricky Times Ahead For Huaibei Mining HoldingsLtd (SHSE:600985)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Huaibei Mining HoldingsLtd (SHSE:600985), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Huaibei Mining HoldingsLtd is:

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

0.10 = CN¥6.3b ÷ (CN¥87b - CN¥26b) (Based on the trailing twelve months to March 2024).

Therefore, Huaibei Mining HoldingsLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Metals and Mining industry.

View 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Huaibei Mining HoldingsLtd .

What Can We Tell From Huaibei Mining HoldingsLtd's ROCE Trend?

On the surface, the trend of ROCE at Huaibei Mining HoldingsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. 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'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.

On a related note, Huaibei Mining HoldingsLtd has decreased its current liabilities to 30% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Huaibei Mining HoldingsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 85% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 2 warning signs with Huaibei Mining HoldingsLtd and understanding these should be part of your investment process.

While Huaibei Mining HoldingsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com