What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Zhaojin Mining Industry (HKG:1818) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Zhaojin Mining Industry, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CN¥1.3b ÷ (CN¥49b - CN¥18b) (Based on the trailing twelve months to September 2023).
Thus, Zhaojin Mining Industry has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.4%.
In the above chart we have measured Zhaojin Mining Industry'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 report on analyst forecasts for the company.
The Trend Of ROCE
The returns on capital haven't changed much for Zhaojin Mining Industry in recent years. The company has consistently earned 4.1% for the last five years, and the capital employed within the business has risen 29% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On Zhaojin Mining Industry's ROCE
In conclusion, Zhaojin Mining Industry has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 27% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we've found 1 warning sign for Zhaojin Mining Industry that we think you should be aware of.
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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.
Zhaojin Mining Industry
Zhaojin Mining Industry Company Limited, an investment holding company, engages in exploration, mining, processing, smelting, and sale of gold and silver products in the People’s Republic of China.
Reasonable growth potential with proven track record.