If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Qifeng New Material (SZSE:002521) so let's look a bit deeper.
What Is 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. The formula for this calculation on Qifeng New Material is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = CN¥350m ÷ (CN¥5.2b - CN¥1.4b) (Based on the trailing twelve months to March 2024).
Therefore, Qifeng New Material has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 5.7% generated by the Forestry industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Qifeng New Material's ROCE against it's prior returns. If you're interested in investigating Qifeng New Material's past further, check out this free graph covering Qifeng New Material's past earnings, revenue and cash flow.
So How Is Qifeng New Material's ROCE Trending?
Qifeng New Material has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 1,318% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Qifeng New Material's ROCE
To bring it all together, Qifeng New Material has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 114% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 1 warning sign with Qifeng New Material and understanding it should be part of your investment process.
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.