Why We Like The Returns At Henan Shenhuo Coal Industary and Electricity Power (SZSE:000933)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Henan Shenhuo Coal Industary and Electricity Power's (SZSE:000933) look very promising so lets take a look.

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 Henan Shenhuo Coal Industary and Electricity Power, this is the formula:

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

0.21 = CN¥7.0b ÷ (CN¥59b - CN¥27b) (Based on the trailing twelve months to March 2024).

So, Henan Shenhuo Coal Industary and Electricity Power has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 6.7% earned by companies in a similar industry.

View our latest analysis for Henan Shenhuo Coal Industary and Electricity Power

Above you can see how the current ROCE for Henan Shenhuo Coal Industary and Electricity Power compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Henan Shenhuo Coal Industary and Electricity Power .

The Trend Of ROCE

Henan Shenhuo Coal Industary and Electricity Power is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 163%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Henan Shenhuo Coal Industary and Electricity Power has decreased current liabilities to 45% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Henan Shenhuo Coal Industary and Electricity Power has. Since the stock has returned a staggering 469% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Henan Shenhuo Coal Industary and Electricity Power can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Henan Shenhuo Coal Industary and Electricity Power, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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