If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Asia-potash International Investment (Guangzhou)Co.Ltd (SZSE:000893) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Asia-potash International Investment (Guangzhou)Co.Ltd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = CN¥1.2b ÷ (CN¥16b - CN¥2.1b) (Based on the trailing twelve months to March 2024).
Thus, Asia-potash International Investment (Guangzhou)Co.Ltd has an ROCE of 8.1%. On its own that's a low return, but compared to the average of 5.6% generated by the Chemicals industry, it's much better.
In the above chart we have measured Asia-potash International Investment (Guangzhou)Co.Ltd'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 Asia-potash International Investment (Guangzhou)Co.Ltd for free.
So How Is Asia-potash International Investment (Guangzhou)Co.Ltd's ROCE Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 270% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In Conclusion...
To sum it up, Asia-potash International Investment (Guangzhou)Co.Ltd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 150% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Asia-potash International Investment (Guangzhou)Co.Ltd (of which 1 is a bit concerning!) that 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.
