To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Zhaojin Mining Industry (HKG:1818) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Zhaojin Mining Industry, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = CN¥1.0b ÷ (CN¥50b - CN¥18b) (Based on the trailing twelve months to June 2023).
Thus, Zhaojin Mining Industry has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.4%.
See our latest analysis for Zhaojin Mining Industry
Above you can see how the current ROCE for Zhaojin Mining Industry 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 Does the ROCE Trend For Zhaojin Mining Industry Tell Us?
On the surface, the trend of ROCE at Zhaojin Mining Industry doesn't inspire confidence. Around five years ago the returns on capital were 4.8%, but since then they've fallen to 3.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Zhaojin Mining Industry's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Zhaojin Mining Industry is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 66% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you'd like to know about the risks facing Zhaojin Mining Industry, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.