China Coal Energy (HKG:1898) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, China Coal Energy (HKG:1898) 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 China Coal Energy, this is the formula:

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

0.10 = CN¥26b ÷ (CN¥346b - CN¥93b) (Based on the trailing twelve months to September 2023).

So, China Coal Energy has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Oil and Gas industry.

Check out our latest analysis for China Coal Energy

In the above chart we have measured China Coal Energy'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 China Coal Energy here for free.

So How Is China Coal Energy's ROCE Trending?

China Coal Energy is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 28%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On China Coal Energy's ROCE

In summary, it's great to see that China Coal Energy 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching China Coal Energy, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.