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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So on that note, Henan Senyuan Electric (SZSE:002358) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Henan Senyuan Electric is:

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

0.077 = CN¥257m ÷ (CN¥6.5b - CN¥3.2b) (Based on the trailing twelve months to September 2024).

Thus, Henan Senyuan Electric has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.8%.

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're interested in investigating Henan Senyuan Electric's past further, check out this free graph covering Henan Senyuan Electric's past earnings, revenue and cash flow.

So How Is Henan Senyuan Electric's ROCE Trending?

Henan Senyuan Electric has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 401% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 35% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, Henan Senyuan Electric's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In a nutshell, we're pleased to see that Henan Senyuan Electric has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 24% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 1 warning sign for Henan Senyuan Electric that we think you should be aware of.

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.