What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Qian Jiang Water Resources DevelopmentLtd's (SHSE:600283) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Qian Jiang Water Resources DevelopmentLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = CN¥303m ÷ (CN¥7.0b - CN¥2.4b) (Based on the trailing twelve months to March 2023).
Therefore, Qian Jiang Water Resources DevelopmentLtd has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.2%.
View our latest analysis for Qian Jiang Water Resources DevelopmentLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Qian Jiang Water Resources DevelopmentLtd's ROCE against it's prior returns. If you'd like to look at how Qian Jiang Water Resources DevelopmentLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The fact that Qian Jiang Water Resources DevelopmentLtd is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.7% on its capital. Not only that, but the company is utilizing 28% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Qian Jiang Water Resources DevelopmentLtd's ROCE
Overall, Qian Jiang Water Resources DevelopmentLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has only returned 25% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you want to continue researching Qian Jiang Water Resources DevelopmentLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.