To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Guizhou Panjiang Refined CoalLtd (SHSE:600395) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Guizhou Panjiang Refined CoalLtd:

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

0.025 = CN¥669m ÷ (CN¥37b - CN¥9.9b) (Based on the trailing twelve months to March 2024).

Therefore, Guizhou Panjiang Refined CoalLtd has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 11%.

Above you can see how the current ROCE for Guizhou Panjiang Refined CoalLtd 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 Guizhou Panjiang Refined CoalLtd for free.

What Can We Tell From Guizhou Panjiang Refined CoalLtd's ROCE Trend?

On the surface, the trend of ROCE at Guizhou Panjiang Refined CoalLtd doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 2.5%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Guizhou Panjiang Refined CoalLtd's diminishing returns on increasing amounts of capital. However the stock has delivered a 41% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Guizhou Panjiang Refined CoalLtd we've found 4 warning signs (3 are concerning!) that you should be aware of before investing here.

While Guizhou Panjiang Refined CoalLtd 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.

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