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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Tongguan Gold Group (HKG:340) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tongguan Gold Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = HK$177m ÷ (HK$3.9b - HK$662m) (Based on the trailing twelve months to December 2021).
Therefore, Tongguan Gold Group has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 14%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tongguan Gold Group's ROCE against it's prior returns. If you'd like to look at how Tongguan Gold Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Tongguan Gold Group Tell Us?
We're delighted to see that Tongguan Gold Group is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 5.5% on its capital. In addition to that, Tongguan Gold Group is employing 395% more capital than previously which is expected of a company that's trying to break into profitability. 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.
What We Can Learn From Tongguan Gold Group's ROCE
Long story short, we're delighted to see that Tongguan Gold Group's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 24% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Tongguan Gold Group, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Tongguan Gold Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.