There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Xinjiang Joinworld (SHSE:600888), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Xinjiang Joinworld is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = CN¥346m ÷ (CN¥17b - CN¥4.2b) (Based on the trailing twelve months to September 2023).
Thus, Xinjiang Joinworld has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.3%.
Above you can see how the current ROCE for Xinjiang Joinworld compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Xinjiang Joinworld Tell Us?
When we looked at the ROCE trend at Xinjiang Joinworld, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.6% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line
In summary, we're somewhat concerned by Xinjiang Joinworld's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 91% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing, we've spotted 1 warning sign facing Xinjiang Joinworld that you might find interesting.
While Xinjiang Joinworld 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.
