If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at China National Building Material (HKG:3323) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for China National Building Material, this is the formula:

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

0.13 = CN¥36b ÷ (CN¥463b - CN¥183b) (Based on the trailing twelve months to December 2021).

Thus, China National Building Material has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 9.3% it's much better.

Check out our latest analysis for China National Building Material

In the above chart we have measured China National Building Material's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China National Building Material.

The Trend Of ROCE

We like the trends that we're seeing from China National Building Material. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. 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 104%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 40%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that China National Building Material has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China National Building Material has. 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.

One more thing, we've spotted 2 warning signs facing China National Building Material that you might find interesting.

While China National Building Material 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.