Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 the ROCE trend of Henan Shenhuo Coal & PowerLtd (SZSE:000933) we really liked what we saw.

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 Henan Shenhuo Coal & PowerLtd, this is the formula:

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

0.30 = CN¥8.3b ÷ (CN¥61b - CN¥33b) (Based on the trailing twelve months to September 2023).

Therefore, Henan Shenhuo Coal & PowerLtd has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 6.3% earned by companies in a similar industry.

In the above chart we have measured Henan Shenhuo Coal & PowerLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Henan Shenhuo Coal & PowerLtd .

What Does the ROCE Trend For Henan Shenhuo Coal & PowerLtd Tell Us?

Investors would be pleased with what's happening at Henan Shenhuo Coal & PowerLtd. Over the last five years, returns on capital employed have risen substantially to 30%. The amount of capital employed has increased too, by 102%. So we're very much inspired by what we're seeing at Henan Shenhuo Coal & PowerLtd thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 54%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Henan Shenhuo Coal & PowerLtd has. And a remarkable 329% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Henan Shenhuo Coal & PowerLtd you'll probably want to know about.

Henan Shenhuo Coal & PowerLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.