China Northern Rare Earth (Group) High-TechLtd (SHSE:600111) Has Some Way To Go To Become A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think China Northern Rare Earth (Group) High-TechLtd (SHSE:600111) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for China Northern Rare Earth (Group) High-TechLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.07 = CN¥2.3b ÷ (CN¥42b - CN¥9.3b) (Based on the trailing twelve months to September 2024).

Thus, China Northern Rare Earth (Group) High-TechLtd has an ROCE of 7.0%. Even though it's in line with the industry average of 6.8%, it's still a low return by itself.

Check out our latest analysis for China Northern Rare Earth (Group) High-TechLtd

In the above chart we have measured China Northern Rare Earth (Group) High-TechLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Northern Rare Earth (Group) High-TechLtd for free.

So How Is China Northern Rare Earth (Group) High-TechLtd's ROCE Trending?

The returns on capital haven't changed much for China Northern Rare Earth (Group) High-TechLtd in recent years. The company has employed 89% more capital in the last five years, and the returns on that capital have remained stable at 7.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On China Northern Rare Earth (Group) High-TechLtd's ROCE

As we've seen above, China Northern Rare Earth (Group) High-TechLtd's returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 125% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 1 warning sign facing China Northern Rare Earth (Group) High-TechLtd that you might find interesting.

While China Northern Rare Earth (Group) High-TechLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.