Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Inner Mongolia Dazhong Mining (SZSE:001203), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Inner Mongolia Dazhong Mining, this is the formula:

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

0.12 = CN¥1.0b ÷ (CN¥13b - CN¥4.3b) (Based on the trailing twelve months to September 2023).

So, Inner Mongolia Dazhong Mining has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Metals and Mining industry.

View our latest analysis for Inner Mongolia Dazhong Mining

Above you can see how the current ROCE for Inner Mongolia Dazhong Mining compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at Inner Mongolia Dazhong Mining, we didn't gain much confidence. To be more specific, ROCE has fallen from 23% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Inner Mongolia Dazhong Mining has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line On Inner Mongolia Dazhong Mining's ROCE

In summary, we're somewhat concerned by Inner Mongolia Dazhong Mining's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 26% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Inner Mongolia Dazhong Mining does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Inner Mongolia Dazhong Mining may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.