If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Chongqing Mas Sci.&Tech.Co.Ltd's (SZSE:300275) returns on capital, so let's have a look.
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 Chongqing Mas Sci.&Tech.Co.Ltd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CN¥41m ÷ (CN¥1.3b - CN¥398m) (Based on the trailing twelve months to September 2023).
Therefore, Chongqing Mas Sci.&Tech.Co.Ltd has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.
See our latest analysis for Chongqing Mas Sci.&Tech.Co.Ltd
In the above chart we have measured Chongqing Mas Sci.&Tech.Co.Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Chongqing Mas Sci.&Tech.Co.Ltd's ROCE Trend?
While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 348% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Chongqing Mas Sci.&Tech.Co.Ltd's ROCE
To bring it all together, Chongqing Mas Sci.&Tech.Co.Ltd has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 132% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Chongqing Mas Sci.&Tech.Co.Ltd can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 1 warning sign facing Chongqing Mas Sci.&Tech.Co.Ltd that you might find interesting.
While Chongqing Mas Sci.&Tech.Co.Ltd 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.