If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Henan Yuneng HoldingsLtd's (SZSE:001896) returns on capital, so let's have a look.

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 Henan Yuneng HoldingsLtd, this is the formula:

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

0.029 = CN¥548m ÷ (CN¥32b - CN¥13b) (Based on the trailing twelve months to March 2024).

So, Henan Yuneng HoldingsLtd has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 5.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan Yuneng HoldingsLtd's ROCE against it's prior returns. If you're interested in investigating Henan Yuneng HoldingsLtd's past further, check out this free graph covering Henan Yuneng HoldingsLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Henan Yuneng HoldingsLtd is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.9% which is a sight for sore eyes. In addition to that, Henan Yuneng HoldingsLtd is employing 40% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a separate but related note, it's important to know that Henan Yuneng HoldingsLtd has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. 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.

The Key Takeaway

Long story short, we're delighted to see that Henan Yuneng HoldingsLtd's reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 17% to shareholders. 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 more about Henan Yuneng HoldingsLtd, we've spotted 2 warning signs, and 1 of them can't be ignored.

While Henan Yuneng HoldingsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.