What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Chengdu Guibao Science & TechnologyLtd's (SZSE:300019) 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 Chengdu Guibao Science & TechnologyLtd is:

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

0.13 = CN¥280m ÷ (CN¥2.8b - CN¥624m) (Based on the trailing twelve months to March 2022).

Thus, Chengdu Guibao Science & TechnologyLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10.0% generated by the Chemicals industry.

See our latest analysis for Chengdu Guibao Science & TechnologyLtd

Above you can see how the current ROCE for Chengdu Guibao Science & TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Chengdu Guibao Science & TechnologyLtd here for free.

So How Is Chengdu Guibao Science & TechnologyLtd's ROCE Trending?

We like the trends that we're seeing from Chengdu Guibao Science & TechnologyLtd. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 166% more capital is being employed now too. So we're very much inspired by what we're seeing at Chengdu Guibao Science & TechnologyLtd thanks to its ability to profitably reinvest capital.

The Bottom Line

All in all, it's terrific to see that Chengdu Guibao Science & TechnologyLtd is reaping the rewards from prior investments and is growing its capital base. And a remarkable 141% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Chengdu Guibao Science & TechnologyLtd (of which 1 makes us a bit uncomfortable!) that you should know about.

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.

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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.