If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Shaanxi Coal Industry's (SHSE:601225) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shaanxi Coal Industry, this is the formula:

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

0.25 = CN¥41b ÷ (CN¥202b - CN¥40b) (Based on the trailing twelve months to March 2024).

So, Shaanxi Coal Industry has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 11%.

Above you can see how the current ROCE for Shaanxi Coal Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shaanxi Coal Industry .

How Are Returns Trending?

The trends we've noticed at Shaanxi Coal Industry are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. The amount of capital employed has increased too, by 73%. So we're very much inspired by what we're seeing at Shaanxi Coal Industry thanks to its ability to profitably reinvest capital.

The Key Takeaway

All in all, it's terrific to see that Shaanxi Coal Industry is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Shaanxi Coal Industry does have some risks though, and we've spotted 2 warning signs for Shaanxi Coal Industry that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.