What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Top Energy CompanyShanxi (SHSE:600780) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Top Energy CompanyShanxi is:

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

0.053 = CN¥433m ÷ (CN¥10b - CN¥2.1b) (Based on the trailing twelve months to September 2024).

Thus, Top Energy CompanyShanxi has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.6% average generated by the Renewable Energy industry.

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're interested in investigating Top Energy CompanyShanxi's past further, check out this free graph covering Top Energy CompanyShanxi's past earnings, revenue and cash flow.

How Are Returns Trending?

There hasn't been much to report for Top Energy CompanyShanxi's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Top Energy CompanyShanxi doesn't end up being a multi-bagger in a few years time.

The Bottom Line On Top Energy CompanyShanxi's ROCE

In a nutshell, Top Energy CompanyShanxi has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 99% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 1 warning sign for Top Energy CompanyShanxi you'll probably want to know about.

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.