If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Asia-potash International Investment (Guangzhou)Co.Ltd (SZSE:000893) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Asia-potash International Investment (Guangzhou)Co.Ltd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥1.8b ÷ (CN¥14b - CN¥1.3b) (Based on the trailing twelve months to June 2023).
So, Asia-potash International Investment (Guangzhou)Co.Ltd has an ROCE of 15%. 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 Asia-potash International Investment (Guangzhou)Co.Ltd
Above you can see how the current ROCE for Asia-potash International Investment (Guangzhou)Co.Ltd 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 report for Asia-potash International Investment (Guangzhou)Co.Ltd.
How Are Returns Trending?
We're delighted to see that Asia-potash International Investment (Guangzhou)Co.Ltd is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 15% on its capital. In addition to that, Asia-potash International Investment (Guangzhou)Co.Ltd is employing 526% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
Overall, Asia-potash International Investment (Guangzhou)Co.Ltd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 437% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we've found 1 warning sign for Asia-potash International Investment (Guangzhou)Co.Ltd that we think you should be aware of.
While Asia-potash International Investment (Guangzhou)Co.Ltd 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.