There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Huadian Liaoning Energy DevelopmentLtd (SHSE:600396) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Huadian Liaoning Energy DevelopmentLtd:

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

0.051 = CN¥380m ÷ (CN¥14b - CN¥6.3b) (Based on the trailing twelve months to September 2024).

Thus, Huadian Liaoning Energy DevelopmentLtd has an ROCE of 5.1%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huadian Liaoning Energy DevelopmentLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Huadian Liaoning Energy DevelopmentLtd.

What Can We Tell From Huadian Liaoning Energy DevelopmentLtd's ROCE Trend?

Huadian Liaoning Energy DevelopmentLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 5.1% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 46%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Huadian Liaoning Energy DevelopmentLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

In Conclusion...

To sum it up, Huadian Liaoning Energy DevelopmentLtd is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 46% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Huadian Liaoning Energy DevelopmentLtd can keep these trends up, it could have a bright future ahead.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 600396 that compares the share price and estimated value.

While Huadian Liaoning Energy DevelopmentLtd 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.