Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Henan Shenhuo Coal Industry and Electricity Power (SZSE:000933) we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Henan Shenhuo Coal Industry and Electricity Power:

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

0.21 = CN¥7.0b ÷ (CN¥59b - CN¥27b) (Based on the trailing twelve months to March 2024).

Thus, Henan Shenhuo Coal Industry and Electricity Power has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 6.7%.

Above you can see how the current ROCE for Henan Shenhuo Coal Industry and Electricity Power compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Henan Shenhuo Coal Industry and Electricity Power .

What Can We Tell From Henan Shenhuo Coal Industry and Electricity Power's ROCE Trend?

The trends we've noticed at Henan Shenhuo Coal Industry and Electricity Power are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The amount of capital employed has increased too, by 163%. 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 45%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line

All in all, it's terrific to see that Henan Shenhuo Coal Industry and Electricity Power is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 511% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Henan Shenhuo Coal Industry and Electricity Power you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.

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