China Rare Earth Holdings (HKG:769) Might Have The Makings Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in China Rare Earth Holdings' (HKG:769) returns on capital, so let's have a look.

What is 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 China Rare Earth Holdings is:

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

0.0062 = HK$18m ÷ (HK$3.0b - HK$151m) (Based on the trailing twelve months to June 2021).

Thus, China Rare Earth Holdings has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.

View our latest analysis for China Rare Earth Holdings

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

So How Is China Rare Earth Holdings' ROCE Trending?

Shareholders will be relieved that China Rare Earth Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.6% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On China Rare Earth Holdings' ROCE

To bring it all together, China Rare Earth Holdings has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 18% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching China Rare Earth Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

While China Rare Earth Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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