What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Chongqing Mas Sci.&Tech.Co.Ltd (SZSE:300275) so let's look a bit deeper.
What Is 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 Chongqing Mas Sci.&Tech.Co.Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = CN¥72m ÷ (CN¥1.3b - CN¥353m) (Based on the trailing twelve months to March 2024).
Therefore, Chongqing Mas Sci.&Tech.Co.Ltd has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 6.3% generated by the Machinery industry, it's much better.
Above you can see how the current ROCE for Chongqing Mas Sci.&Tech.Co.Ltd 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 analyst report for Chongqing Mas Sci.&Tech.Co.Ltd .
How Are Returns Trending?
We're delighted to see that Chongqing Mas Sci.&Tech.Co.Ltd is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 7.7% which is a sight for sore eyes. In addition to that, Chongqing Mas Sci.&Tech.Co.Ltd is employing 80% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Our Take On Chongqing Mas Sci.&Tech.Co.Ltd's ROCE
In summary, it's great to see that Chongqing Mas Sci.&Tech.Co.Ltd has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 57% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Chongqing Mas Sci.&Tech.Co.Ltd does have some risks though, and we've spotted 1 warning sign for Chongqing Mas Sci.&Tech.Co.Ltd that you might be interested in.
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.