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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Inner Mongolia MengDian HuaNeng Thermal Power's (SHSE:600863) returns on capital, so let's have 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. Analysts use this formula to calculate it for Inner Mongolia MengDian HuaNeng Thermal Power:

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

0.11 = CN¥3.6b ÷ (CN¥40b - CN¥7.5b) (Based on the trailing twelve months to September 2024).

Thus, Inner Mongolia MengDian HuaNeng Thermal Power has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 5.6% it's much better.

View our latest analysis for Inner Mongolia MengDian HuaNeng Thermal Power

Above you can see how the current ROCE for Inner Mongolia MengDian HuaNeng Thermal 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 Inner Mongolia MengDian HuaNeng Thermal Power .

The Trend Of ROCE

Inner Mongolia MengDian HuaNeng Thermal Power is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 51% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

One more thing to note, Inner Mongolia MengDian HuaNeng Thermal Power has decreased current liabilities to 19% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Inner Mongolia MengDian HuaNeng Thermal Power has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

As discussed above, Inner Mongolia MengDian HuaNeng Thermal Power appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 105% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 1 warning sign with Inner Mongolia MengDian HuaNeng Thermal Power and understanding this should be part of your investment process.

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.