What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Guizhou Panjiang Refined CoalLtd (SHSE:600395) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)
0.072 = CN¥1.6b ÷ (CN¥32b - CN¥9.4b) (Based on the trailing twelve months to June 2023).
Thus, Guizhou Panjiang Refined CoalLtd has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 14%.
View our latest analysis for Guizhou Panjiang Refined CoalLtd
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 to see what analysts are forecasting going forward, you should check out our free report for Guizhou Panjiang Refined CoalLtd.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 15% five years ago, while the business's capital employed increased by 165%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Guizhou Panjiang Refined CoalLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for Guizhou Panjiang Refined CoalLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 49% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Guizhou Panjiang Refined CoalLtd (of which 1 is a bit concerning!) that you should know about.
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.