If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Shenzhen Zhongjin Lingnan Nonfemet (SZSE:000060) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shenzhen Zhongjin Lingnan Nonfemet:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = CN¥1.5b ÷ (CN¥45b - CN¥13b) (Based on the trailing twelve months to September 2023).
So, Shenzhen Zhongjin Lingnan Nonfemet has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.2%.
View our latest analysis for Shenzhen Zhongjin Lingnan Nonfemet
In the above chart we have measured Shenzhen Zhongjin Lingnan Nonfemet's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Zhongjin Lingnan Nonfemet here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Shenzhen Zhongjin Lingnan Nonfemet, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.7% from 11% five years ago. However it looks like Shenzhen Zhongjin Lingnan Nonfemet might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
Our Take On Shenzhen Zhongjin Lingnan Nonfemet's ROCE
To conclude, we've found that Shenzhen Zhongjin Lingnan Nonfemet is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One final note, you should learn about the 3 warning signs we've spotted with Shenzhen Zhongjin Lingnan Nonfemet (including 1 which doesn't sit too well with us) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.