Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Yangzhou Chenhua New Material (SZSE:300610) so let's look a bit deeper.

Understanding 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. The formula for this calculation on Yangzhou Chenhua New Material is:

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

0.13 = CN¥152m ÷ (CN¥1.4b - CN¥302m) (Based on the trailing twelve months to June 2022).

Therefore, Yangzhou Chenhua New Material has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.7% it's much better.

View our latest analysis for Yangzhou Chenhua New Material

Above you can see how the current ROCE for Yangzhou Chenhua New Material compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Yangzhou Chenhua New Material Tell Us?

Investors would be pleased with what's happening at Yangzhou Chenhua New Material. Over the last five years, returns on capital employed have risen substantially to 13%. 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 72%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Yangzhou Chenhua New Material's ROCE

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 Yangzhou Chenhua New Material has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 7.7% 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.

One final note, you should learn about the 2 warning signs we've spotted with Yangzhou Chenhua New Material (including 1 which is potentially serious) .

While Yangzhou Chenhua New Material 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.

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.