There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Lingbao Gold Group (HKG:3330) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lingbao Gold Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = CN¥559m ÷ (CN¥7.9b - CN¥4.5b) (Based on the trailing twelve months to June 2024).
So, Lingbao Gold Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Metals and Mining industry.
View our latest analysis for Lingbao Gold Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Lingbao Gold Group has performed in the past in other metrics, you can view this free graph of Lingbao Gold Group's past earnings, revenue and cash flow.
What Can We Tell From Lingbao Gold Group's ROCE Trend?
The fact that Lingbao Gold Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 16% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Lingbao Gold Group is utilizing 40% 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 side note, Lingbao Gold Group's current liabilities are still rather high at 57% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
Long story short, we're delighted to see that Lingbao Gold Group's reinvestment activities have paid off and the company is now profitable. And a remarkable 119% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to know some of the risks facing Lingbao Gold Group we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.