To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Zhaojin Mining Industry (HKG:1818) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Zhaojin Mining Industry, this is the formula:

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

0.069 = CN¥2.6b ÷ (CN¥53b - CN¥15b) (Based on the trailing twelve months to September 2024).

Thus, Zhaojin Mining Industry has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 10%.

Above you can see how the current ROCE for Zhaojin Mining Industry 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 Zhaojin Mining Industry for free.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 36% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

All in all, it's terrific to see that Zhaojin Mining Industry is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know about the risks facing Zhaojin Mining Industry, we've discovered 2 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.