What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Zhaojin Mining Industry's (HKG:1818) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Zhaojin Mining Industry:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = CN¥2.6b ÷ (CN¥53b - CN¥15b) (Based on the trailing twelve months to September 2024).
Therefore, Zhaojin Mining Industry has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 10%.
Check out our latest analysis for Zhaojin Mining Industry
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 analyst report for Zhaojin Mining Industry .
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 36%. So we're very much inspired by what we're seeing at Zhaojin Mining Industry thanks to its ability to profitably reinvest capital.
The Bottom Line
To sum it up, Zhaojin Mining Industry has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 39% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
Zhaojin Mining Industry does have some risks though, and we've spotted 2 warning signs for Zhaojin Mining Industry that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.