If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Red Avenue New Materials Group (SHSE:603650), it didn't seem to tick all of these boxes.
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. To calculate this metric for Red Avenue New Materials Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = CN¥208m ÷ (CN¥7.3b - CN¥1.7b) (Based on the trailing twelve months to September 2023).
Therefore, Red Avenue New Materials Group has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.0%.
In the above chart we have measured Red Avenue New Materials Group'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 analyst report for Red Avenue New Materials Group .
What Does the ROCE Trend For Red Avenue New Materials Group Tell Us?
When we looked at the ROCE trend at Red Avenue New Materials Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 23% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Red Avenue New Materials Group's ROCE
While returns have fallen for Red Avenue New Materials Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 8.7% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
If you want to continue researching Red Avenue New Materials Group, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.