Chongqing Iron & Steel's (HKG:1053) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Chongqing Iron & Steel (HKG:1053) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Chongqing Iron & Steel:

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

0.034 = CN¥895m ÷ (CN¥40b - CN¥13b) (Based on the trailing twelve months to June 2022).

So, Chongqing Iron & Steel has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 12%.

See our latest analysis for Chongqing Iron & Steel

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chongqing Iron & Steel's ROCE against it's prior returns. If you'd like to look at how Chongqing Iron & Steel has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Chongqing Iron & Steel's ROCE Trending?

We're delighted to see that Chongqing Iron & Steel is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 3.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Chongqing Iron & Steel is utilizing 234% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 33%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Chongqing Iron & Steel has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Chongqing Iron & Steel's ROCE

In summary, it's great to see that Chongqing Iron & Steel has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 51% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Chongqing Iron & Steel does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.