To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at CNNC Hua Yuan Titanium Dioxide (SZSE:002145) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. To calculate this metric for CNNC Hua Yuan Titanium Dioxide, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = CN¥151m ÷ (CN¥18b - CN¥4.7b) (Based on the trailing twelve months to September 2023).
Thus, CNNC Hua Yuan Titanium Dioxide has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.6%.
Check out our latest analysis for CNNC Hua Yuan Titanium Dioxide
Above you can see how the current ROCE for CNNC Hua Yuan Titanium Dioxide 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 CNNC Hua Yuan Titanium Dioxide.
What Can We Tell From CNNC Hua Yuan Titanium Dioxide's ROCE Trend?
On the surface, the trend of ROCE at CNNC Hua Yuan Titanium Dioxide doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 1.1%. However it looks like CNNC Hua Yuan Titanium Dioxide 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 may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From CNNC Hua Yuan Titanium Dioxide's ROCE
To conclude, we've found that CNNC Hua Yuan Titanium Dioxide is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 80% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
CNNC Hua Yuan Titanium Dioxide does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should 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.