To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over China Shenhua Energy's (HKG:1088) trend of ROCE, we liked what we saw.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Shenhua Energy:

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

0.16 = CN¥88b ÷ (CN¥661b - CN¥93b) (Based on the trailing twelve months to December 2024).

Thus, China Shenhua Energy has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Oil and Gas industry.

Check out our latest analysis for China Shenhua Energy

In the above chart we have measured China Shenhua Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Shenhua Energy .

So How Is China Shenhua Energy's ROCE Trending?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 22% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that China Shenhua Energy has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

To sum it up, China Shenhua Energy has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 279% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for China Shenhua Energy (of which 1 is concerning!) that you should know about.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.