To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Xinjiang JoinworldLtd (SHSE:600888) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Xinjiang JoinworldLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = CN¥932m ÷ (CN¥14b - CN¥3.5b) (Based on the trailing twelve months to September 2022).
Thus, Xinjiang JoinworldLtd has an ROCE of 8.6%. On its own, that's a low figure but it's around the 8.2% average generated by the Metals and Mining industry.
Check out our latest analysis for Xinjiang JoinworldLtd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Xinjiang JoinworldLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Xinjiang JoinworldLtd's ROCE Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.6%. The amount of capital employed has increased too, by 73%. 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.
One more thing to note, Xinjiang JoinworldLtd has decreased current liabilities to 25% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Xinjiang JoinworldLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Key Takeaway
All in all, it's terrific to see that Xinjiang JoinworldLtd is reaping the rewards from prior investments and is growing its capital base. And with a respectable 47% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to continue researching Xinjiang JoinworldLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Xinjiang JoinworldLtd 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.