Capital Investments At Nanjing COSMOS Chemical (SZSE:300856) Point To A Promising Future

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Nanjing COSMOS Chemical's (SZSE:300856) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Nanjing COSMOS Chemical, this is the formula:

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

0.24 = CN¥870m ÷ (CN¥4.1b - CN¥453m) (Based on the trailing twelve months to March 2024).

So, Nanjing COSMOS Chemical has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 5.5%.

Check out our latest analysis for Nanjing COSMOS Chemical

In the above chart we have measured Nanjing COSMOS Chemical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nanjing COSMOS Chemical .

What Does the ROCE Trend For Nanjing COSMOS Chemical Tell Us?

It's hard not to be impressed by Nanjing COSMOS Chemical's returns on capital. The company has employed 691% more capital in the last five years, and the returns on that capital have remained stable at 24%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Nanjing COSMOS Chemical can keep this up, we'd be very optimistic about its future.

On a side note, Nanjing COSMOS Chemical has done well to reduce current liabilities to 11% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On Nanjing COSMOS Chemical's ROCE

In summary, we're delighted to see that Nanjing COSMOS Chemical has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 106% return to those who've held over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Nanjing COSMOS Chemical does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.

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