Inner Mongolia MengDian HuaNeng Thermal Power's (SHSE:600863) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Inner Mongolia MengDian HuaNeng Thermal Power (SHSE:600863) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Inner Mongolia MengDian HuaNeng Thermal Power is:

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

0.11 = CN¥3.7b ÷ (CN¥40b - CN¥5.5b) (Based on the trailing twelve months to March 2024).

Thus, Inner Mongolia MengDian HuaNeng Thermal Power has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Renewable Energy industry.

View our latest analysis for Inner Mongolia MengDian HuaNeng Thermal Power

In the above chart we have measured Inner Mongolia MengDian HuaNeng Thermal Power'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 Inner Mongolia MengDian HuaNeng Thermal Power .

How Are Returns Trending?

Inner Mongolia MengDian HuaNeng Thermal Power has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 37% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

In summary, we're delighted to see that Inner Mongolia MengDian HuaNeng Thermal Power has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 60% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for Inner Mongolia MengDian HuaNeng Thermal Power you'll probably want to know about.

While Inner Mongolia MengDian HuaNeng Thermal Power 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.