Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Ningxia Western Venture IndustrialLtd (SZSE:000557) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. The formula for this calculation on Ningxia Western Venture IndustrialLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = CN¥270m ÷ (CN¥6.6b - CN¥492m) (Based on the trailing twelve months to September 2024).
So, Ningxia Western Venture IndustrialLtd has an ROCE of 4.4%. Even though it's in line with the industry average of 4.2%, it's still a low return by itself.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningxia Western Venture IndustrialLtd's ROCE against it's prior returns. If you're interested in investigating Ningxia Western Venture IndustrialLtd's past further, check out this free graph covering Ningxia Western Venture IndustrialLtd's past earnings, revenue and cash flow.
So How Is Ningxia Western Venture IndustrialLtd's ROCE Trending?
There are better returns on capital out there than what we're seeing at Ningxia Western Venture IndustrialLtd. The company has consistently earned 4.4% for the last five years, and the capital employed within the business has risen 23% 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.
The Bottom Line On Ningxia Western Venture IndustrialLtd's ROCE
In conclusion, Ningxia Western Venture IndustrialLtd has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 75% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Ningxia Western Venture IndustrialLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 000557 on our platform quite valuable.
While Ningxia Western Venture IndustrialLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
