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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Inner Mongolia ERDOS ResourcesLtd's (SHSE:900936) returns on capital, so let's have a look.

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 Inner Mongolia ERDOS ResourcesLtd is:

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

0.28 = CN¥8.9b ÷ (CN¥48b - CN¥17b) (Based on the trailing twelve months to September 2022).

Thus, Inner Mongolia ERDOS ResourcesLtd has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.2%.

Check out our latest analysis for Inner Mongolia ERDOS ResourcesLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Inner Mongolia ERDOS ResourcesLtd's ROCE against it's prior returns. If you'd like to look at how Inner Mongolia ERDOS ResourcesLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Inner Mongolia ERDOS ResourcesLtd's ROCE Trending?

The trends we've noticed at Inner Mongolia ERDOS ResourcesLtd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 28%. Basically the business is earning more per dollar of capital invested and in addition to that, 54% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 35%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Inner Mongolia ERDOS ResourcesLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Inner Mongolia ERDOS ResourcesLtd's ROCE

In summary, it's great to see that Inner Mongolia ERDOS ResourcesLtd 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. Since the stock has returned a staggering 230% 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, we've spotted 1 warning sign facing Inner Mongolia ERDOS ResourcesLtd that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.