Did you know there are some financial metrics that can provide clues of a potential 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. Speaking of which, we noticed some great changes in Yongxing Special Materials TechnologyLtd's (SZSE:002756) 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. The formula for this calculation on Yongxing Special Materials TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.44 = CN¥5.8b ÷ (CN¥15b - CN¥2.3b) (Based on the trailing twelve months to September 2023).
Thus, Yongxing Special Materials TechnologyLtd has an ROCE of 44%. That's a fantastic return and not only that, it outpaces the average of 6.6% earned by companies in a similar industry.
Above you can see how the current ROCE for Yongxing Special Materials TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Yongxing Special Materials TechnologyLtd .
What Can We Tell From Yongxing Special Materials TechnologyLtd's ROCE Trend?
Investors would be pleased with what's happening at Yongxing Special Materials TechnologyLtd. Over the last five years, returns on capital employed have risen substantially to 44%. Basically the business is earning more per dollar of capital invested and in addition to that, 280% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In Conclusion...
In summary, it's great to see that Yongxing Special Materials TechnologyLtd 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One final note, you should learn about the 2 warning signs we've spotted with Yongxing Special Materials TechnologyLtd (including 1 which is concerning) .
Yongxing Special Materials TechnologyLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.