What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Yinbang Clad MaterialLtd (SZSE:300337) 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)?
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 Yinbang Clad MaterialLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = CN¥134m ÷ (CN¥4.8b - CN¥1.1b) (Based on the trailing twelve months to September 2023).
Therefore, Yinbang Clad MaterialLtd has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.2%.
View our latest analysis for Yinbang Clad MaterialLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Yinbang Clad MaterialLtd's ROCE against it's prior returns. If you're interested in investigating Yinbang Clad MaterialLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Yinbang Clad MaterialLtd. The company has consistently earned 3.7% for the last five years, and the capital employed within the business has risen 77% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, Yinbang Clad MaterialLtd has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
What We Can Learn From Yinbang Clad MaterialLtd's ROCE
Long story short, while Yinbang Clad MaterialLtd has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 81% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you'd like to know about the risks facing Yinbang Clad MaterialLtd, we've discovered 3 warning signs that you should be aware of.
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.