Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think China Tungsten And Hightech MaterialsLtd (SZSE:000657) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for China Tungsten And Hightech MaterialsLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = CN¥495m ÷ (CN¥13b - CN¥4.8b) (Based on the trailing twelve months to March 2024).
Thus, China Tungsten And Hightech MaterialsLtd has an ROCE of 5.9%. On its own, that's a low figure but it's around the 6.7% average generated by the Metals and Mining industry.
Above you can see how the current ROCE for China Tungsten And Hightech MaterialsLtd 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 China Tungsten And Hightech MaterialsLtd .
The Trend Of ROCE
When we looked at the ROCE trend at China Tungsten And Hightech MaterialsLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.2% over the last five years. However it looks like China Tungsten And Hightech MaterialsLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
In summary, China Tungsten And Hightech MaterialsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 132% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a final note, we found 3 warning signs for China Tungsten And Hightech MaterialsLtd (1 is a bit concerning) you should be aware of.
While China Tungsten And Hightech MaterialsLtd 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.