If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Huadian Liaoning Energy DevelopmentLtd (SHSE:600396) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Huadian Liaoning Energy DevelopmentLtd, this is the formula:

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

0.031 = CN¥199m ÷ (CN¥14b - CN¥7.2b) (Based on the trailing twelve months to March 2024).

Thus, Huadian Liaoning Energy DevelopmentLtd has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.8%.

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 Huadian Liaoning Energy DevelopmentLtd has performed in the past in other metrics, you can view this free graph of Huadian Liaoning Energy DevelopmentLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

It's great to see that Huadian Liaoning Energy DevelopmentLtd has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 3.1% on their capital employed. Additionally, the business is utilizing 27% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Huadian Liaoning Energy DevelopmentLtd could be selling under-performing assets since the ROCE is improving.

On a side note, Huadian Liaoning Energy DevelopmentLtd's current liabilities are still rather high at 53% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

From what we've seen above, Huadian Liaoning Energy DevelopmentLtd has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 36% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know about the risks facing Huadian Liaoning Energy DevelopmentLtd, we've discovered 1 warning sign that 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.

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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.