What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Inner Mongolia Junzheng Energy & Chemical GroupLtd (SHSE:601216) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Inner Mongolia Junzheng Energy & Chemical GroupLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = CN¥2.8b ÷ (CN¥41b - CN¥10b) (Based on the trailing twelve months to September 2023).
Thus, Inner Mongolia Junzheng Energy & Chemical GroupLtd has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.
See our latest analysis for Inner Mongolia Junzheng Energy & Chemical GroupLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Inner Mongolia Junzheng Energy & Chemical GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Inner Mongolia Junzheng Energy & Chemical GroupLtd, check out these free graphs here.
How Are Returns Trending?
When we looked at the ROCE trend at Inner Mongolia Junzheng Energy & Chemical GroupLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like Inner Mongolia Junzheng Energy & Chemical GroupLtd 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.
What We Can Learn From Inner Mongolia Junzheng Energy & Chemical GroupLtd's ROCE
In summary, Inner Mongolia Junzheng Energy & Chemical GroupLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 74% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a separate note, we've found 1 warning sign for Inner Mongolia Junzheng Energy & Chemical GroupLtd you'll probably want to know about.
While Inner Mongolia Junzheng Energy & Chemical GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.