Nanjing COSMOS Chemical (SZSE:300856) Might Become A Compounding Machine

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Nanjing COSMOS Chemical's (SZSE:300856) ROCE trend, we were very happy with what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.23 = CN¥670m ÷ (CN¥3.3b - CN¥338m) (Based on the trailing twelve months to June 2023).

So, Nanjing COSMOS Chemical has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 5.7% earned by companies in a similar industry.

View 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 .

How Are Returns Trending?

In terms of Nanjing COSMOS Chemical's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 655% more capital into its operations. Now considering ROCE is an attractive 23%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Nanjing COSMOS Chemical can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 10% of total assets, is good to see from a business owner's perspective. 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 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. And the stock has followed suit returning a meaningful 93% to shareholders over the last three years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Nanjing COSMOS Chemical (of which 1 shouldn't be ignored!) that you should know about.

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.