If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, the ROCE of Anhui Hengyuan Coal Industry and Electricity PowerLtd (SHSE:600971) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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 Anhui Hengyuan Coal Industry and Electricity PowerLtd, this is the formula:

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

0.13 = CN¥2.0b ÷ (CN¥22b - CN¥5.8b) (Based on the trailing twelve months to March 2024).

Therefore, Anhui Hengyuan Coal Industry and Electricity PowerLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 11% it's much better.

Above you can see how the current ROCE for Anhui Hengyuan Coal Industry and Electricity PowerLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Anhui Hengyuan Coal Industry and Electricity PowerLtd .

What Does the ROCE Trend For Anhui Hengyuan Coal Industry and Electricity PowerLtd Tell Us?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 61% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Anhui Hengyuan Coal Industry and Electricity PowerLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Anhui Hengyuan Coal Industry and Electricity PowerLtd's ROCE

To sum it up, Anhui Hengyuan Coal Industry and Electricity PowerLtd has simply been reinvesting capital steadily, at those decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 202% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Anhui Hengyuan Coal Industry and Electricity PowerLtd does have some risks though, and we've spotted 1 warning sign for Anhui Hengyuan Coal Industry and Electricity PowerLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com