If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Yunnan Energy New Material (SZSE:002812), it didn't seem to tick all of these boxes.
Understanding 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 Yunnan Energy New Material, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = CN¥3.5b ÷ (CN¥47b - CN¥12b) (Based on the trailing twelve months to September 2023).
Thus, Yunnan Energy New Material has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.
See our latest analysis for Yunnan Energy New Material
In the above chart we have measured Yunnan Energy New Material's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yunnan Energy New Material.
So How Is Yunnan Energy New Material's ROCE Trending?
We weren't thrilled with the trend because Yunnan Energy New Material's ROCE has reduced by 24% over the last five years, while the business employed 637% more capital. 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Yunnan Energy New Material's earnings and if they change as a result from the capital raise.
Our Take On Yunnan Energy New Material's ROCE
In summary, Yunnan Energy New Material is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 86% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing, we've spotted 4 warning signs facing Yunnan Energy New Material that you might find interesting.
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.
