If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after investigating Jiangsu Yangnong Chemical (SHSE:600486), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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 Jiangsu Yangnong Chemical is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥1.8b ÷ (CN¥16b - CN¥5.5b) (Based on the trailing twelve months to September 2023).
Thus, Jiangsu Yangnong Chemical has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Chemicals industry.
Above you can see how the current ROCE for Jiangsu Yangnong Chemical 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 analyst report for Jiangsu Yangnong Chemical .
So How Is Jiangsu Yangnong Chemical's ROCE Trending?
On the surface, the trend of ROCE at Jiangsu Yangnong Chemical doesn't inspire confidence. To be more specific, ROCE has fallen from 29% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
Our Take On Jiangsu Yangnong Chemical's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Jiangsu Yangnong Chemical have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 42% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a final note, we've found 1 warning sign for Jiangsu Yangnong Chemical that we think you should be aware of.
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.
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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.