What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Ningbo Color Master Batch (SZSE:301019) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Ningbo Color Master Batch, this is the formula:

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

0.094 = CN¥101m ÷ (CN¥1.2b - CN¥71m) (Based on the trailing twelve months to March 2024).

So, Ningbo Color Master Batch has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 5.8% generated by the Chemicals 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 Ningbo Color Master Batch's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ningbo Color Master Batch.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ningbo Color Master Batch doesn't inspire confidence. To be more specific, ROCE has fallen from 26% over the last five years. However it looks like Ningbo Color Master Batch might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Ningbo Color Master Batch has decreased its current liabilities to 6.1% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Ningbo Color Master Batch is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 20% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Ningbo Color Master Batch (of which 1 can't be ignored!) that you should know about.

While Ningbo Color Master Batch 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.