Returns At Shaanxi Energy Investment (SZSE:001286) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at Shaanxi Energy Investment (SZSE:001286) and its trend of ROCE, we really liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shaanxi Energy Investment:

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

0.11 = CN¥5.6b ÷ (CN¥65b - CN¥13b) (Based on the trailing twelve months to March 2024).

So, Shaanxi Energy Investment 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.

See our latest analysis for Shaanxi Energy Investment

In the above chart we have measured Shaanxi Energy Investment'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 Shaanxi Energy Investment for free.

So How Is Shaanxi Energy Investment's ROCE Trending?

The trends we've noticed at Shaanxi Energy Investment are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 79% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Shaanxi Energy Investment has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Shaanxi Energy Investment's ROCE

In summary, it's great to see that Shaanxi Energy Investment 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. Since the stock has returned a solid 7.1% to shareholders over the last year, it's fair to say investors are beginning to recognize 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.

Like most companies, Shaanxi Energy Investment does come with some risks, and we've found 2 warning signs that you should be aware of.

While Shaanxi Energy Investment may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.