If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Shaanxi Meineng Clean EnergyLtd (SZSE:001299) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Shaanxi Meineng Clean EnergyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = CN¥81m ÷ (CN¥1.6b - CN¥383m) (Based on the trailing twelve months to December 2022).
So, Shaanxi Meineng Clean EnergyLtd has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 9.2%.
Check out our latest analysis for Shaanxi Meineng Clean EnergyLtd
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 Shaanxi Meineng Clean EnergyLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Shaanxi Meineng Clean EnergyLtd's ROCE Trend?
On the surface, the trend of ROCE at Shaanxi Meineng Clean EnergyLtd doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 6.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Shaanxi Meineng Clean EnergyLtd has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On Shaanxi Meineng Clean EnergyLtd's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shaanxi Meineng Clean EnergyLtd. These growth trends haven't led to growth returns though, since the stock has fallen 32% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a final note, we've found 1 warning sign for Shaanxi Meineng Clean EnergyLtd that we think you should be aware of.
While Shaanxi Meineng Clean EnergyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
