There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Yinbang Clad MaterialLtd (SZSE:300337) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Yinbang Clad MaterialLtd, this is the formula:

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

0.046 = CN¥174m ÷ (CN¥4.5b - CN¥748m) (Based on the trailing twelve months to March 2024).

So, Yinbang Clad MaterialLtd has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.7%.

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're interested in investigating Yinbang Clad MaterialLtd's past further, check out this free graph covering Yinbang Clad MaterialLtd's past earnings, revenue and cash flow.

What Can We Tell From Yinbang Clad MaterialLtd's ROCE Trend?

The fact that Yinbang Clad MaterialLtd is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.6% on its capital. In addition to that, Yinbang Clad MaterialLtd is employing 100% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 17%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Yinbang Clad MaterialLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Yinbang Clad MaterialLtd's ROCE

Overall, Yinbang Clad MaterialLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 85% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Yinbang Clad MaterialLtd can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Yinbang Clad MaterialLtd (of which 2 are significant!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com