If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Nanjing Hanrui CobaltLtd (SZSE:300618), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for Nanjing Hanrui CobaltLtd:

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

0.052 = CN¥306m ÷ (CN¥8.2b - CN¥2.3b) (Based on the trailing twelve months to March 2024).

So, Nanjing Hanrui CobaltLtd has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.7%.

Above you can see how the current ROCE for Nanjing Hanrui CobaltLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nanjing Hanrui CobaltLtd for free.

So How Is Nanjing Hanrui CobaltLtd's ROCE Trending?

On the surface, the trend of ROCE at Nanjing Hanrui CobaltLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.2% from 26% five years ago. However it looks like Nanjing Hanrui CobaltLtd 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 28%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.2%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Nanjing Hanrui CobaltLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Nanjing Hanrui CobaltLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 30% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Nanjing Hanrui CobaltLtd, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Nanjing Hanrui CobaltLtd 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.