Nanjing COSMOS Chemical (SZSE:300856) Is Reinvesting To Multiply In Value

Did you know there are some financial metrics that can provide clues of a potential 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. Ergo, when we looked at the ROCE trends at Nanjing COSMOS Chemical (SZSE:300856), we 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 Nanjing COSMOS Chemical:

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

0.25 = CN¥900m ÷ (CN¥4.1b - CN¥425m) (Based on the trailing twelve months to June 2024).

Therefore, Nanjing COSMOS Chemical has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.

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're interested, you can view the analysts predictions in our free analyst report for Nanjing COSMOS Chemical .

So How Is Nanjing COSMOS Chemical's ROCE Trending?

It's hard not to be impressed by Nanjing COSMOS Chemical's returns on capital. The company has employed 631% more capital in the last five years, and the returns on that capital have remained stable at 25%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Nanjing COSMOS Chemical has done well to reduce current liabilities to 10% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 165% 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 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.