Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Jinneng Holding Shanxi Coal Industryltd (SHSE:601001) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Jinneng Holding Shanxi Coal Industryltd, this is the formula:

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

0.14 = CN¥3.9b ÷ (CN¥38b - CN¥10b) (Based on the trailing twelve months to September 2023).

So, Jinneng Holding Shanxi Coal Industryltd has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 12%.

In the above chart we have measured Jinneng Holding Shanxi Coal Industryltd'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 report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at Jinneng Holding Shanxi Coal Industryltd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 17% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Jinneng Holding Shanxi Coal Industryltd has done well to pay down its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Jinneng Holding Shanxi Coal Industryltd's ROCE

We're a bit apprehensive about Jinneng Holding Shanxi Coal Industryltd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 206% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 2 warning signs with Jinneng Holding Shanxi Coal Industryltd and understanding them should be part of your investment process.

While Jinneng Holding Shanxi Coal Industryltd 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.