If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So when we looked at the ROCE trend of Shanxi Lu'an Environmental Energy Development (SHSE:601699) we really liked what we saw.
Understanding 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. The formula for this calculation on Shanxi Lu'an Environmental Energy Development is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = CN¥17b ÷ (CN¥89b - CN¥32b) (Based on the trailing twelve months to September 2023).
Therefore, Shanxi Lu'an Environmental Energy Development has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 12%.
See our latest analysis for Shanxi Lu'an Environmental Energy Development
In the above chart we have measured Shanxi Lu'an Environmental Energy Development's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanxi Lu'an Environmental Energy Development.
What Can We Tell From Shanxi Lu'an Environmental Energy Development's ROCE Trend?
Shanxi Lu'an Environmental Energy Development is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. The amount of capital employed has increased too, by 69%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a related note, the company's ratio of current liabilities to total assets has decreased to 36%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
In Conclusion...
In summary, it's great to see that Shanxi Lu'an Environmental Energy Development 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 a remarkable 357% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
One final note, you should learn about the 2 warning signs we've spotted with Shanxi Lu'an Environmental Energy Development (including 1 which is a bit unpleasant) .
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.