If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at China Rare Earth Resources And Technology (SZSE:000831), it didn't seem to tick all of these boxes.

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. To calculate this metric for China Rare Earth Resources And Technology, this is the formula:

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

0.0015 = CN¥7.1m ÷ (CN¥5.3b - CN¥544m) (Based on the trailing twelve months to June 2024).

Therefore, China Rare Earth Resources And Technology has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.0%.

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

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 5.4% five years ago, while the business's capital employed increased by 112%. That being said, China Rare Earth Resources And Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence China Rare Earth Resources And Technology might not have received a full period of earnings contribution from it.

The Bottom Line

We're a bit apprehensive about China Rare Earth Resources And Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 133% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

China Rare Earth Resources And Technology does have some risks though, and we've spotted 3 warning signs for China Rare Earth Resources And Technology that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.