Returns On Capital At Shaanxi Meineng Clean EnergyLtd (SZSE:001299) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Shaanxi Meineng Clean EnergyLtd (SZSE:001299) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Shaanxi Meineng Clean EnergyLtd is:

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

0.065 = CN¥81m ÷ (CN¥1.6b - CN¥383m) (Based on the trailing twelve months to December 2022).

Thus, Shaanxi Meineng Clean EnergyLtd has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 9.2%.

View our latest analysis for Shaanxi Meineng Clean EnergyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shaanxi Meineng Clean EnergyLtd's ROCE against it's prior returns. 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.

What Does the ROCE Trend For Shaanxi Meineng Clean EnergyLtd Tell Us?

On the surface, the trend of ROCE at Shaanxi Meineng Clean EnergyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Shaanxi Meineng Clean EnergyLtd has decreased its current liabilities to 24% 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.

Our Take On Shaanxi Meineng Clean EnergyLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shaanxi Meineng Clean EnergyLtd. These growth trends haven't led to growth returns though, since the stock has fallen 35% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing Shaanxi Meineng Clean EnergyLtd, we've discovered 1 warning sign that you should be aware of.

While Shaanxi Meineng Clean EnergyLtd 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.