Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Kaili Catalyst & New MaterialsLtd's (SHSE:688269) ROCE trend, we were pretty happy with what we saw.

What Is 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. The formula for this calculation on Kaili Catalyst & New MaterialsLtd is:

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

0.19 = CN¥198m ÷ (CN¥1.3b - CN¥270m) (Based on the trailing twelve months to June 2023).

So, Kaili Catalyst & New MaterialsLtd has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.9% it's much better.

View our latest analysis for Kaili Catalyst & New MaterialsLtd

In the above chart we have measured Kaili Catalyst & New MaterialsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Kaili Catalyst & New MaterialsLtd Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has employed 301% more capital in the last five years, and the returns on that capital have remained stable at 19%. 19% is a pretty standard return, and it provides some comfort knowing that Kaili Catalyst & New MaterialsLtd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

In the end, Kaili Catalyst & New MaterialsLtd has proven its ability to adequately reinvest capital at good rates of return. Yet over the last year the stock has declined 48%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a final note, we found 2 warning signs for Kaili Catalyst & New MaterialsLtd (1 is a bit concerning) you should be aware of.

While Kaili Catalyst & New 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.