There's Been No Shortage Of Growth Recently For Inner Mongolia MengDian HuaNeng Thermal Power's (SHSE:600863) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Inner Mongolia MengDian HuaNeng Thermal Power (SHSE:600863) looks quite promising in regards to its trends of return on capital.

What Is 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. To calculate this metric for Inner Mongolia MengDian HuaNeng Thermal Power, this is the formula:

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

0.11 = CN¥3.7b ÷ (CN¥41b - CN¥6.8b) (Based on the trailing twelve months to September 2023).

Therefore, 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 5.8% generated by the Renewable Energy industry.

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'd like, you can check out the forecasts from the analysts covering Inner Mongolia MengDian HuaNeng Thermal Power for free.

How Are Returns Trending?

Inner Mongolia MengDian HuaNeng Thermal Power has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 43% in that same time. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a related note, the company's ratio of current liabilities to total assets has decreased to 17%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Inner Mongolia MengDian HuaNeng Thermal Power's ROCE

To sum it up, Inner Mongolia MengDian HuaNeng Thermal Power is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 91% return over the last five years. In light of that, we think it's worth looking further into this stock because if Inner Mongolia MengDian HuaNeng Thermal Power can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Inner Mongolia MengDian HuaNeng Thermal Power and understanding them 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.