There are a few key trends to look for if we want to identify the next multi-bagger. 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, we've noticed some promising trends at Kunming Chuan Jin Nuo Chemical (SZSE:300505) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Kunming Chuan Jin Nuo Chemical, this is the formula:
0.16 = CN¥310m ÷ (CN¥2.5b - CN¥519m) (Based on the trailing twelve months to March 2022).
So, Kunming Chuan Jin Nuo Chemical has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.0% it's much better.
View our latest analysis for Kunming Chuan Jin Nuo ChemicalSZSE:300505 Return on Capital Employed July 19th 2022
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Kunming Chuan Jin Nuo Chemical, check out these free graphs here.
What Does the ROCE Trend For Kunming Chuan Jin Nuo Chemical Tell Us?
Kunming Chuan Jin Nuo Chemical is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 180% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line
All in all, it's terrific to see that Kunming Chuan Jin Nuo Chemical is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 72% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we found 3 warning signs for Kunming Chuan Jin Nuo Chemical (2 are significant) you should be aware of.
While Kunming Chuan Jin Nuo Chemical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.