If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 briefly looking over the numbers, we don't think Inner Mongolia Junzheng Energy & Chemical GroupLtd (SHSE:601216) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Inner Mongolia Junzheng Energy & Chemical GroupLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.074 = CN¥2.3b ÷ (CN¥40b - CN¥8.9b) (Based on the trailing twelve months to March 2024).

So, Inner Mongolia Junzheng Energy & Chemical GroupLtd has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.7%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Inner Mongolia Junzheng Energy & Chemical GroupLtd.

What Does the ROCE Trend For Inner Mongolia Junzheng Energy & Chemical GroupLtd Tell Us?

When we looked at the ROCE trend at Inner Mongolia Junzheng Energy & Chemical GroupLtd, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 7.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Inner Mongolia Junzheng Energy & Chemical GroupLtd's ROCE

In summary, we're somewhat concerned by Inner Mongolia Junzheng Energy & Chemical GroupLtd's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 46% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing Inner Mongolia Junzheng Energy & Chemical GroupLtd, we've discovered 1 warning sign that you should be aware of.

While Inner Mongolia Junzheng Energy & Chemical GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.