Investors Could Be Concerned With Shaanxi Meineng Clean EnergyLtd's (SZSE:001299) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Shaanxi Meineng Clean EnergyLtd (SZSE:001299) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Shaanxi Meineng Clean EnergyLtd is:

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

0.045 = CN¥59m ÷ (CN¥1.8b - CN¥435m) (Based on the trailing twelve months to December 2023).

Therefore, Shaanxi Meineng Clean EnergyLtd has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 9.0%.

View our latest analysis for Shaanxi Meineng Clean EnergyLtd

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 Shaanxi Meineng Clean EnergyLtd has performed in the past in other metrics, you can view this free graph of Shaanxi Meineng Clean EnergyLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Shaanxi Meineng Clean EnergyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.5% from 15% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shaanxi Meineng Clean EnergyLtd has done well to pay down its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Shaanxi Meineng Clean EnergyLtd's ROCE

In summary, Shaanxi Meineng Clean EnergyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 1 warning sign for Shaanxi Meineng Clean EnergyLtd that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.