Returns On Capital Are Showing Encouraging Signs At China Northern Rare Earth (Group) High-TechLtd (SHSE:600111)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, China Northern Rare Earth (Group) High-TechLtd (SHSE:600111) looks quite promising in regards to its trends of return on capital.

What Is 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 Northern Rare Earth (Group) High-TechLtd, this is the formula:

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

0.096 = CN¥3.1b ÷ (CN¥41b - CN¥8.9b) (Based on the trailing twelve months to September 2023).

So, China Northern Rare Earth (Group) High-TechLtd has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 6.6%.

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

Above you can see how the current ROCE for China Northern Rare Earth (Group) High-TechLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for China Northern Rare Earth (Group) High-TechLtd .

What Can We Tell From China Northern Rare Earth (Group) High-TechLtd's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 9.6%. 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 87%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

In summary, it's great to see that China Northern Rare Earth (Group) High-TechLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 92% 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. In light of that, we think it's worth looking further into this stock because if China Northern Rare Earth (Group) High-TechLtd can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with China Northern Rare Earth (Group) High-TechLtd and understanding these should be part of your investment process.

While China Northern Rare Earth (Group) High-TechLtd 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.