If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 China Coal Energy (HKG:1898) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 China Coal Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥30b ÷ (CN¥361b - CN¥97b) (Based on the trailing twelve months to September 2024).
Thus, China Coal Energy has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Oil and Gas industry.
Check out our latest analysis for China Coal Energy
In the above chart we have measured China Coal Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Coal Energy for free.
What Can We Tell From China Coal Energy's ROCE Trend?
We like the trends that we're seeing from China Coal Energy. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 39%. 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.
The Bottom Line On China Coal Energy's ROCE
All in all, it's terrific to see that China Coal Energy is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 440% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if China Coal Energy can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 1 warning sign with China Coal Energy and understanding this should be part of your investment process.
While China Coal Energy 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.