Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Anhui Hengyuan Coal Industry and Electricity PowerLtd (SHSE:600971) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.12 = CN¥1.8b ÷ (CN¥21b - CN¥6.0b) (Based on the trailing twelve months to June 2024).

Thus, Anhui Hengyuan Coal Industry and Electricity PowerLtd has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Oil and Gas industry.

In the above chart we have measured Anhui Hengyuan Coal Industry and Electricity PowerLtd'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 analyst report for Anhui Hengyuan Coal Industry and Electricity PowerLtd .

So How Is Anhui Hengyuan Coal Industry and Electricity PowerLtd's ROCE Trending?

On the surface, the trend of ROCE at Anhui Hengyuan Coal Industry and Electricity PowerLtd doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 12%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

In summary, Anhui Hengyuan Coal Industry and Electricity PowerLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 190% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Anhui Hengyuan Coal Industry and Electricity PowerLtd, we've discovered 2 warning signs that you should be aware of.

While Anhui Hengyuan Coal Industry and Electricity PowerLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.