If you are looking for a multi-bagger, there are a few things to look out for. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth quantity capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits into the business and generating higher returns. So on that note, China Resources Cement Holdings (HKG: 1313) looks pretty promising when it comes to its return on capital trends.
What is Return on Employee Capital (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for China Resources Cement Holdings:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.16 = 8.6 billion HK $ ÷ (72 billion HK $ – 18 billion HK $) (Based on the last twelve months up to September 2021).
Thereby, China Resources Cement Holdings has a ROCE of 16%. In absolute terms, this is a satisfactory performance, but compared to the basic materials industry average of 13%, it is much better.
See our latest analysis for China Resources Cement Holdings
Above you can see how China Resources Cement Holdings’ current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What is the trend for returns?
We like the trends we see from China Resources Cement Holdings. Figures show that over the past five years, returns on capital employed have increased dramatically to 16%. The company actually makes more money per dollar of capital used, and it should be noted that the amount of capital has also increased by 31%. Increasing returns on an increasing amount of capital are common among multi-baggers and that is why we are impressed.
The key to take away
To sum up, China Resources Cement Holdings has proven that it can reinvest in the business and generate higher returns on capital employed, which is great. And a remarkable 162% total return over the past five years tells us that investors are expecting more good things to come in the future. That being said, we still believe that promising fundamentals mean the company deserves additional due diligence.
On a final note, we found 3 warning signs for China Resources Cement Holdings that we think you should be aware of.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.