If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So on that note, Ningxia Zhongyin Cashmere (SZSE:000982) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ningxia Zhongyin Cashmere:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0047 = CN¥6.0m ÷ (CN¥1.6b - CN¥310m) (Based on the trailing twelve months to September 2023).
Thus, Ningxia Zhongyin Cashmere has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 5.4%.
See our latest analysis for Ningxia Zhongyin Cashmere
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningxia Zhongyin Cashmere's ROCE against it's prior returns. If you'd like to look at how Ningxia Zhongyin Cashmere has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Like most people, we're pleased that Ningxia Zhongyin Cashmere is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 54% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Ningxia Zhongyin Cashmere could be selling under-performing assets since the ROCE is improving.
One more thing to note, Ningxia Zhongyin Cashmere has decreased current liabilities to 19% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Bottom Line On Ningxia Zhongyin Cashmere's ROCE
In the end, Ningxia Zhongyin Cashmere has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 12% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
On a separate note, we've found 1 warning sign for Ningxia Zhongyin Cashmere you'll probably want to know about.
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.