The Return Trends At Huadian Liaoning Energy DevelopmentLtd (SHSE:600396) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Huadian Liaoning Energy DevelopmentLtd's (SHSE:600396) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Huadian Liaoning Energy DevelopmentLtd, this is the formula:

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

0.036 = CN¥243m ÷ (CN¥14b - CN¥6.8b) (Based on the trailing twelve months to June 2024).

Thus, Huadian Liaoning Energy DevelopmentLtd has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.7%.

Check out our latest analysis for Huadian Liaoning Energy DevelopmentLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Huadian Liaoning Energy DevelopmentLtd has performed in the past in other metrics, you can view this free graph of Huadian Liaoning Energy DevelopmentLtd's past earnings, revenue and cash flow.

So How Is Huadian Liaoning Energy DevelopmentLtd's ROCE Trending?

We're delighted to see that Huadian Liaoning Energy DevelopmentLtd is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 3.6% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Another thing to note, Huadian Liaoning Energy DevelopmentLtd has a high ratio of current liabilities to total assets of 50%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To bring it all together, Huadian Liaoning Energy DevelopmentLtd has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 71% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Huadian Liaoning Energy DevelopmentLtd can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Huadian Liaoning Energy DevelopmentLtd that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.