There are a few key trends to look for if we are to identify the next multi-bagger. Among other things, we’ll want to see two things; first of all, a growth to return to on capital employed (ROCE) and on the other hand, an expansion of the quantity capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. Speaking of which, we have noticed some big changes in Chongqing Iron and Steel (HKG: 1053) returns of capital, so let’s take a look.

Understanding Return on Capital Employed (ROCE)

If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for Chongqing iron and steel:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.14 = CN ¥ 3.8b ÷ (CN ¥ 42b – CN ¥ 13b) (Based on the last twelve months up to September 2021).

Thereby, Chongqing Iron & Steel has a ROCE of 14%. This is a relatively normal return on capital, and it is around the 13% generated by the metals and mining industry.

Check out our latest review for Chongqing Iron & Steel

Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to delve into Chongqing Iron & Steel’s historic earnings, revenue and cash flow, check out these free graphics here.

What is the trend for returns?

The fact that Chongqing Iron & Steel is now generating pre-tax profits on its previous investments is very encouraging. The company was making losses five years ago, but now it’s gaining 14%, which is a sight to behold. Not only that, but the business is using 122% more capital than before, but that’s to be expected of a business trying to achieve profitability. This may tell us that the company has many reinvestment opportunities capable of generating higher returns.

In another part of our analysis, we noticed that the ratio of the company’s current liabilities to total assets decreased to 32%, which means overall that the company relies less on its suppliers. or its short-term creditors to finance its operations. This tells us that Chongqing Iron & Steel has increased its returns without depending on the increase in its short-term debt, which we are very happy with.

The key to take away

In short, we are delighted to see that Chongqing Iron & Steel’s reinvestment activities have paid off and the business is now profitable. Savvy investors may have an opportunity here because the stock has fallen 46% in the past five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 1 warning sign for Chongqing iron and steel that we think you should be aware of.

For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.