To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at China Coal Energy (HKG:1898) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on China Coal Energy is:

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

0.14 = CN¥35b ÷ (CN¥338b - CN¥98b) (Based on the trailing twelve months to March 2022).

So, China Coal Energy has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Oil and Gas industry.

View our latest analysis for China Coal Energy

Above you can see how the current ROCE for China Coal Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Coal Energy.

How Are Returns Trending?

We like the trends that we're seeing from China Coal Energy. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 31%. So we're very much inspired by what we're seeing at China Coal Energy thanks to its ability to profitably reinvest capital.

Our Take On China Coal Energy's ROCE

In summary, it's great to see that China Coal Energy can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 95% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 2 warning signs with China Coal Energy (at least 1 which is significant) , and understanding these would certainly be useful.

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.