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

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, the ROCE of Henan Shenhuo Coal Industry and Electricity Power (SZSE:000933) looks great, so lets see what the trend can tell us.

What Is 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. Analysts use this formula to calculate it for Henan Shenhuo Coal Industry and Electricity Power:

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

0.22 = CN¥7.1b ÷ (CN¥59b - CN¥26b) (Based on the trailing twelve months to June 2024).

Thus, Henan Shenhuo Coal Industry and Electricity Power has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 7.1%.

See our latest analysis for Henan Shenhuo Coal Industry and Electricity Power

In the above chart we have measured Henan Shenhuo Coal Industry and Electricity Power's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Henan Shenhuo Coal Industry and Electricity Power for free.

What The Trend Of ROCE Can Tell Us

Henan Shenhuo Coal Industry and Electricity Power is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 22%. 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 167%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 44%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On Henan Shenhuo Coal Industry and Electricity Power's ROCE

In summary, it's great to see that Henan Shenhuo Coal Industry and Electricity Power can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing Henan Shenhuo Coal Industry and Electricity Power that you might find interesting.

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.