If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Yunnan Chihong Zinc & Germanium (SHSE:600497) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for Yunnan Chihong Zinc & Germanium:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.081 = CN¥1.8b ÷ (CN¥27b - CN¥4.5b) (Based on the trailing twelve months to March 2024).

Thus, Yunnan Chihong Zinc & Germanium has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 6.8%.

Above you can see how the current ROCE for Yunnan Chihong Zinc & Germanium compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yunnan Chihong Zinc & Germanium for free.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Yunnan Chihong Zinc & Germanium, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Yunnan Chihong Zinc & Germanium doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Yunnan Chihong Zinc & Germanium has been paying out a decent 40% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 16% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Yunnan Chihong Zinc & Germanium's ROCE

In a nutshell, Yunnan Chihong Zinc & Germanium has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 26% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, Yunnan Chihong Zinc & Germanium does come with some risks, and we've found 1 warning sign 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.