If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Zibo Qixiang Tengda Chemical (SZSE:002408) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Zibo Qixiang Tengda Chemical:

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

0.17 = CN¥3.0b ÷ (CN¥27b - CN¥10b) (Based on the trailing twelve months to March 2022).

Thus, Zibo Qixiang Tengda Chemical has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.9% it's much better.

Check out our latest analysis for Zibo Qixiang Tengda Chemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zibo Qixiang Tengda Chemical's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zibo Qixiang Tengda Chemical, check out these free graphs here.

So How Is Zibo Qixiang Tengda Chemical's ROCE Trending?

Zibo Qixiang Tengda Chemical is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 174%. So we're very much inspired by what we're seeing at Zibo Qixiang Tengda Chemical thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Zibo Qixiang Tengda Chemical has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 19% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Zibo Qixiang Tengda Chemical does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Zibo Qixiang Tengda Chemical 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.

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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.