Why The 21% Return On Capital At Qinghai Salt Lake IndustryLtd (SZSE:000792) Should Have Your Attention

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Qinghai Salt Lake IndustryLtd (SZSE:000792) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Qinghai Salt Lake IndustryLtd:

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

0.21 = CN¥8.0b ÷ (CN¥47b - CN¥9.0b) (Based on the trailing twelve months to March 2024).

Thus, Qinghai Salt Lake IndustryLtd has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 5.5%.

See our latest analysis for Qinghai Salt Lake IndustryLtd

In the above chart we have measured Qinghai Salt Lake IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Qinghai Salt Lake IndustryLtd .

How Are Returns Trending?

Qinghai Salt Lake IndustryLtd has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 1,649% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

One more thing to note, Qinghai Salt Lake IndustryLtd has decreased current liabilities to 19% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Qinghai Salt Lake IndustryLtd's ROCE

To bring it all together, Qinghai Salt Lake IndustryLtd has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Qinghai Salt Lake IndustryLtd does have some risks though, and we've spotted 1 warning sign for Qinghai Salt Lake IndustryLtd that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.

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