There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Ningbo Color Master Batch (SZSE:301019) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Ningbo Color Master Batch is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = CN¥92m ÷ (CN¥1.1b - CN¥63m) (Based on the trailing twelve months to September 2023).
Therefore, Ningbo Color Master Batch has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo Color Master Batch's ROCE against it's prior returns. If you'd like to look at how Ningbo Color Master Batch 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
On the surface, the trend of ROCE at Ningbo Color Master Batch doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. However it looks like Ningbo Color Master Batch 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 side note, Ningbo Color Master Batch has done well to pay down its current liabilities to 5.5% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Ningbo Color Master Batch's ROCE
To conclude, we've found that Ningbo Color Master Batch is reinvesting in the business, but returns have been falling. Since the stock has declined 12% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a separate note, we've found 1 warning sign for Ningbo Color Master Batch you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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.