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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, China Nonferrous Mining (HKG:1258) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for China Nonferrous Mining, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = US$361m ÷ (US$3.3b – US$782m) (Based on the trailing twelve months to December 2019).
Therefore, China Nonferrous Mining has an ROCE of 14%. In absolute terms, that’s a satisfactory return, but compared to the Metals and Mining industry average of 6.9% it’s much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Nonferrous Mining’s ROCE against it’s prior returns. If you’d like to look at how China Nonferrous Mining has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From China Nonferrous Mining’s ROCE Trend?
The trends we’ve noticed at China Nonferrous Mining are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 14%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 34%. 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.
Our Take On China Nonferrous Mining’s ROCE
To sum it up, China Nonferrous Mining has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 2.4% to its stockholders over the last five years, it may be fair to think that investors aren’t fully aware of the promising trends yet. Given that, we’d look further into this stock in case it has more traits that could make it multiply in the long term.
One more thing, we’ve spotted 2 warning signs facing China Nonferrous Mining that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. 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.
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