What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Shenghe Resources Holding (SHSE:600392) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Shenghe Resources Holding:

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

0.022 = CN¥236m ÷ (CN¥15b - CN¥4.0b) (Based on the trailing twelve months to September 2023).

Therefore, Shenghe Resources Holding has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.2%.

View our latest analysis for Shenghe Resources Holding

Above you can see how the current ROCE for Shenghe Resources Holding 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 Shenghe Resources Holding.

What Can We Tell From Shenghe Resources Holding's ROCE Trend?

When we looked at the ROCE trend at Shenghe Resources Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.8% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

What We Can Learn From Shenghe Resources Holding's ROCE

To conclude, we've found that Shenghe Resources Holding is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 13% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Shenghe Resources Holding, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Shenghe Resources Holding 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.