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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Nantong Jiangshan Agrochemical & ChemicalsLtd (SHSE:600389) looks great, so lets see what the trend can tell us.
Understanding 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 Nantong Jiangshan Agrochemical & ChemicalsLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.45 = CN¥1.6b ÷ (CN¥6.2b - CN¥2.7b) (Based on the trailing twelve months to March 2022).
Thus, Nantong Jiangshan Agrochemical & ChemicalsLtd has an ROCE of 45%. That's a fantastic return and not only that, it outpaces the average of 9.9% earned by companies in a similar industry.
See our latest analysis for Nantong Jiangshan Agrochemical & ChemicalsLtd
SHSE:600389 Return on Capital Employed June 3rd 2022Above you can see how the current ROCE for Nantong Jiangshan Agrochemical & ChemicalsLtd 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 report on analyst forecasts for the company.
What Can We Tell From Nantong Jiangshan Agrochemical & ChemicalsLtd's ROCE Trend?
Investors would be pleased with what's happening at Nantong Jiangshan Agrochemical & ChemicalsLtd. The data shows that returns on capital have increased substantially over the last five years to 45%. The amount of capital employed has increased too, by 128%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a side note, Nantong Jiangshan Agrochemical & ChemicalsLtd's current liabilities are still rather high at 43% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Nantong Jiangshan Agrochemical & ChemicalsLtd's ROCE
To sum it up, Nantong Jiangshan Agrochemical & ChemicalsLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 329% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing: We've identified 3 warning signs with Nantong Jiangshan Agrochemical & ChemicalsLtd (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.
Nantong Jiangshan Agrochemical & ChemicalsLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.