There are a few key trends to look for if we want to identify the next 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. 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 Nanjing Tanker (SHSE:601975) so let's look a bit deeper.
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. To calculate this metric for Nanjing Tanker, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CN¥2.0b ÷ (CN¥12b - CN¥1.1b) (Based on the trailing twelve months to September 2023).
Thus, Nanjing Tanker has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 12% it's much better.
See our latest analysis for Nanjing Tanker
Above you can see how the current ROCE for Nanjing Tanker 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.
So How Is Nanjing Tanker's ROCE Trending?
We like the trends that we're seeing from Nanjing Tanker. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. So we're very much inspired by what we're seeing at Nanjing Tanker thanks to its ability to profitably reinvest capital.
The Bottom Line On Nanjing Tanker's ROCE
In summary, it's great to see that Nanjing Tanker can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 8.4% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
While Nanjing Tanker looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 601975 is currently trading for a fair price.
While Nanjing Tanker isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.