Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Longyan Kaolin Clay (SHSE:605086) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on Longyan Kaolin Clay is:

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

0.087 = CN¥101m ÷ (CN¥1.2b - CN¥77m) (Based on the trailing twelve months to September 2023).

Thus, Longyan Kaolin Clay has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 7.0% generated by the Basic Materials industry, it's much better.

See our latest analysis for Longyan Kaolin Clay

Historical performance is a great place to start when researching a stock so above you can see the gauge for Longyan Kaolin Clay's ROCE against it's prior returns. If you'd like to look at how Longyan Kaolin Clay has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Longyan Kaolin Clay Tell Us?

When we looked at the ROCE trend at Longyan Kaolin Clay, we didn't gain much confidence. To be more specific, ROCE has fallen from 23% over the last five years. However it looks like Longyan Kaolin Clay might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Longyan Kaolin Clay has decreased its current liabilities to 6.2% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Longyan Kaolin Clay's ROCE

Bringing it all together, while we're somewhat encouraged by Longyan Kaolin Clay's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 24% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Longyan Kaolin Clay, we've discovered 1 warning sign that you should be aware of.

While Longyan Kaolin Clay 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.