If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Nanjing Hanrui CobaltLtd (SZSE:300618), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Nanjing Hanrui CobaltLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = CN¥168m ÷ (CN¥7.5b - CN¥2.0b) (Based on the trailing twelve months to September 2023).
Therefore, Nanjing Hanrui CobaltLtd has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.2%.
View our latest analysis for Nanjing Hanrui CobaltLtd
Above you can see how the current ROCE for Nanjing Hanrui CobaltLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 53% five years ago, while the business's capital employed increased by 142%. Usually this isn't ideal, but given Nanjing Hanrui CobaltLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Nanjing Hanrui CobaltLtd's earnings and if they change as a result from the capital raise.
Our Take On Nanjing Hanrui CobaltLtd's ROCE
Bringing it all together, while we're somewhat encouraged by Nanjing Hanrui CobaltLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 47% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a separate note, we've found 2 warning signs for Nanjing Hanrui CobaltLtd you'll probably want to know about.
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.