The Returns On Capital At Huaibei Mining HoldingsLtd (SHSE:600985) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Huaibei Mining HoldingsLtd (SHSE:600985), it didn't seem to tick all of these boxes.

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. 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)

0.097 = CN¥6.0b ÷ (CN¥90b - CN¥28b) (Based on the trailing twelve months to September 2024).

Thus, Huaibei Mining HoldingsLtd has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 6.8%.

Check out our latest analysis for Huaibei Mining HoldingsLtd

Above you can see how the current ROCE for Huaibei Mining HoldingsLtd 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 Huaibei Mining HoldingsLtd for free.

How Are Returns Trending?

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 17%, but since then they've fallen to 9.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

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. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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, despite lower returns in the short term, we're encouraged to see that Huaibei Mining HoldingsLtd is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 107% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 2 warning signs for Huaibei Mining HoldingsLtd that we think you should be aware of.

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.